Don't let fear affect your long-term investments

The dangers of reacting to short-term economic sensations and making your investment decisions

In the digital age, current affairs news reach our living rooms 24x7. The power of Internet and social media makes news and rumours spread like wildfire. Because of this information overload we become so focussed on details that we begin to ignore the overall situation. If we are unable to see the woods for the trees, then we must take a step back from the situation, to regain a wider perspective.

Many investors change their long-term investments based on the short-term news that creates a sensation. They switch from risky investments to safe investments the moment they hear this. They 'act first and think later'. This is very dangerous as far as investment decisions are considered.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the director and chief financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Thailand and Europe

In fact today, any investor's biggest worry is not the Indian market; the problem is the Eurozone.

Thailand faced a major natural disaster in 2011. Severe flooding occurred during the monsoon season. The World Bank's estimate for this disaster ranks it as the world's fourth costliest disaster as of 2011.

Investors focussing only on the short-term crisis advocated a long-term bear phase in Thailand's equity market then. But Thailand's equity market rebounded in the first quarter (April to June) of 2012. This was possible because of the right kind of steps taken by the government like policy measures to stimulate the economy and reconstruction efforts. IMF now projects Thailand's GDP to grow 5.5 per cent in 2012 and 7.5 per cent in 2013.

Similarly the European debt crisis has created a negative sensation among many investors. They have started advocating a long-term bear phase in the European markets and other related markets. The fact is these markets have already factored this debt crisis. The possibility of further unexpected negative news seems to be very less.

In due course, this European crisis will settle down too. European leaders are determined to solve the fiscal deficit problem. They have enforced discipline on countries who have not fulfilled their fiscal obligations.

Of course the austerity recommendations will not happen in some countries. This is because of the bureaucracy or the lack of will by the political leadership. But the leaders are determined and resolute. They have taken all the bold and prudent decisions so far and are moving in the right direction. They have taken many painful steps in the short run but it has got the potential to produce a more positive long-term result for all.

Investor expectations

Investors are looking for assurance. Though they all know it is impossible, they expect positive outcomes and favourable news every day.

Even today investors remember the market crash of 2008. Sensex has fallen down from 20,873 to 8,160, a loss of 61 per cent from the peak. But how many of us recollect the much faster recovery of 2009 and 2010 in which the Sensex recovered from 8,160 to 21,004, a gain of 157 per cent.

Investors remember the sudden market crash irrespective of experiencing loss or not. But they don't recollect the much faster recovery if they have not gained out of it.

We all know the fate of investors who moved out because of the bad news about the market at the end of 2008 and beginning of 2009. They have all missed the faster recovery of 157 per cent.

So whenever we hear a sensational current affair, we need to take a step back and look at the big picture to understand the REAL problem. This would be the holistic approach towards your investment decisions.

Do the basics right

To get better long term results as an investor you need to STOP reacting to short-term sensational current affairs. You should do the basics right. You need to invest your long-term money in long-term investments and your short-term money in short-term investments. Make an in-depth fundamental analysis of the investment scheme before investing.

Do periodic review and check if the scheme in which you have invested is not performing, because of the non-performance in the market or poor performance of the scheme itself. If the scheme itself is poorly performing, then you need to cut your losses and move in to better performing schemes in the same asset class. If the market is underperforming, then you need not move out.

Timing vs asset allocation

Timing the market is difficult and almost impossible. So instead of investing in a single asset class diversify across various asset classes by creating an asset allocation ratio based on the risk taking appetite and required rate of return. Then rebalance these assets periodically.

In spite of the short term sensational current affairs news, these time tested investment strategies will give you much better positive outcome to your long-term investments.