If you were to sum up the current situation on the domestic and global front, it can be described as chaotic at best and intimidating at worst. The reasons are not far to seek.
The US continues its rhetoric on the trade war and has brought the EU and India into its trade war fold. With China unyielding on most areas, the trade war looks set to go on.
Global fund managers are turning risk-off with rising demand for negative interest bonds in Japan and Europe. This has serious implications for savers and pensioners.
The situation in the Middle East and West Asia is worsening with Iran threatening to block the Strait of Hormuz as retaliation to the US sanctions.
On the domestic front, there is a slowdown in consumption with auto and FMCG companies issuing advance warnings about a likely slowdown in the coming quarters.
Bad loans of IL&FS, Jet Airways and Dewan Housing are a major overhang. Banks are now contending with the risk of fraud as in the case of Bhushan Power and Steel.
Lastly, Budget 2019 has added a few layers of uncertainty. Increase in public holding, 20% tax on buybacks and tax impact on FPIs are keeping stock markets on tenterhooks.
What should be your strategy to stay your course in these markets?
Stick to your financial plan and be guided by it
This is a broad approach you should not miss out on. Your financial plan is designed with the necessary checks and balances to reallocate based on value. Volatility is a part and parcel of any market and the basic intent of the financial plan is to help you reach your goals through the chaos. The current state of chaos is the time to review your plan, weigh your milestones and rebalance if required. But, stick to the broad mandates of your overall financial plan.
Shift to quality in equity and debt; they handle chaos better
This is your second important mandate in chaotic markets. In the last few years you may have acquired high beta names in your portfolio and also high yield debt instruments of lower quality. That was fine when the markets were stable and predictable. But, the current chaotic situation is not the time to experiment with such asset classes. Ideally, you must stick to assets that give long term growth without too much short term volatility.
Adopt a phased and systematic approach to investing
Even in the most chaotic of times, a systematic approach to investing works. This can be interpreted in a number of ways. From a mutual fund investing perspective, you can look at a SIP approach, especially with respect to equities. You can make the best of the volatility in the markets. In fact, even if you have a lump-sum available with you, convert it into a SIP by using the systematic transfer plan (STP) route. A similar approach can be adopted with direct equities also. Whether you are buying or selling, try to do it in phases rather than in bulk. You stand a better chance of capturing the volatility.
Time to put risk management tools in place
Again, this idea of risk management has multiple implications. From an allocation perspective, try to stick to a diversification approach. Secondly, use futures and options to hedge risk. They can also help you make profits when the markets move contrary to your expectations. Finally, look to increase your allocation to gold. Ideally, gold should be 10-15% of your portfolio; not more. These chaotic times are when you should move your gold allocation closer to the upper limit. After all, gold has traditionally been a timeless hedge against chaos and uncertainty.
Over the last 40 years, Sensex has still given returns of 16% annualized through all the cycles. The need of the hour is to just reduce your portfolio vulnerabilities and strengthen your defences.