Tomorrow’s headlines in leading dailies will probably read – stock market crash india dashes middle class dreams of investors ! Yes, the Indian stock market crash of 2011 is leaving many investors jaded and shaken up. In these tough times, many investors are asking what was the cause, what does it mean to their financial planning, what the hell is going on and what investing should they do next – should they sell their stocks and cut losses; should they buy more or should they just hang in there hoping for the markets to go up ?
On August 5th 2011, Standard & Poor’s struck off the ‘AAA’ rating of the US for the first time since 1914. An ‘AAA’ rating is considered the Gold standard in the world of finance and this loss of reputation meant the stock market world over was going to scramble. The eurozone crisis is there to add fuel to fire and India’s ongoing battle with inflation and the continuous rate hikes by RBI is not helping either. So here we are !
As investors, does one really need to worry about this Indian stock market crash?
First things first, identify whether you are a trader or an investor. Your financial planning and how you manage your money is dependant on this factor to a great extent.
If you are a trader, God bless you. Correct that. May the United Stated of America bless you.
If you are an investor who has followed goal based investing, relax! Smile from ear to ear as this stock market crash of India is going to give you massive opportunities to invest your money.
I keep screaming from this blog –
There is no use in tracking the stock market daily or weekly and then making a decision on where to invest. Timing the stock market is a fool’s goal.
It is the length of time that you stay invested in the stock market that matters. The longer you are in, the better for you.
If you are a long term investor whose financial life is based on the strong tenets of financial planning, watch the madmen run around as the mayhem on Dalal Street unfolds.
If you haven’t got an opportunity to read what you need to do when the stock market goes up, then go here and read about it and you will realize that my advice of what to do when the stock market was up and now when the Indian stock market has crashed is not much different!!!
The modus operandi
Your actions of whether to buy, sell or hold your stocks should not be driven by where the market will go tomorrow or the day after, it should be driven by a concept called asset allocation. Let me explain how.
Asset allocation is about spreading your investments between asset classes such as equities, debt, insurance, real estate, commodities, or even international financial instruments to name a few. When you first made your financial plan, depending on your risk tolerance and the time horizon of your financial goals, you must have chosen a particular asset allocation. That asset allocation is the holy grail of your overall financial planning and should that change, you could be in trouble. You need to stick to it (till the time you are advised otherwise by your financial planner).
For example, your asset allocation could have read 70% equity and 30% debt some months back. Suddenly, the stock market has crashed and your asset allocation is now skewed towards debt and reads as 60% equity and 40% debt. Obviously, if you want to stick to your defined asset allocation, you need to get rid of 10% of debt so that you can come in line with your acceptable asset allocation. This translates into selling 10% of debt and pumping that money into equity or stocks in the share market.
Remember that India’s growth story is intact and the stock market crash of India like the one we are seeing now are blips that will come and go.
Investors should not stop investing in the stock market just because it has plunged. They should continue their investments for their long term goals through systematic investment planning of mutual funds. Direct stock investing should be avoided. In fact, one could even SIP in stocks for higher returns !
At the same time, have a close look at your portfolio and use this stock market crash to clean it. If you have dud stocks and mutual funds, there is no sense in throwing in more money after them to average out. For all you know, they might never recover. Clean the crap and get into the best mutual funds of 2011.
For new investors who want to come in and buy shares from the stock market, the same advice is recommended – avoid direct buying of stocks. Instead, new investors should use the systematic investment planning of mutual funds to take exposure to the stock market. This is the most easiest and least risky way of making money through equities.
So here is what you should be doing.
- Take stock of your asset allocation. It would have skewed towards debt more.
- Sell your loss making stocks or the ones you think are not going to give you acceptable returns. It’s the perfect time to cleanse your portfolio.
- Same goes for equity diversified mutual funds.
- Move the above money into equity systematically to correct your asset allocation.
- Continue investments for long term goals through SIPs.
- If you have a ULIP, you can move your debt holdings into equity to achieve the same results.
- There should be no impact to any other financial instrument you hold because of where the market is today.
- Approach the market with great caution, don’t dab your hands too much with direct stocks.
- Take the mutual fund route to investing your money systematically. It’s a God send investment strategy but sadly, many investors don’t make good use of it.
Remember the stock market crashes come and go and if you ever have to master your money or achieve financial freedom, you need to learn to de-couple yourself from its gyrations. Invest for the long term and be a wise investor.
Hi,
I have ICICI bank and GVL power stocks.
Shoudl I see and get into mutual funds ?
@Manisha, Can;t be answered so simply – depends on a host of factors. ICICI bank is a good stock but depends at what price you got it. I don’t like GVK, if that is what you meant.
Hi Radhey,
Good article – Just underscores the importance of not reacting in a knee jerk fashion to market volatility.
I agree with whatever you say about asset allocation, it is indeed the cornerstone of any portfolio management exercise. Where I would like your opinion though is:
Do you think there is merit in modifying the asset allocation based on the market P/E (Say varying the equity percentage between 70% to 90% based on how high or low the P/E is?). This would then force you to put in money when the market tanks and sell off some portion of your portfolio when the market reaches new highs..
@Ganesh, That indeed is a very interesting point you made. You could do that actually. But where would you draw a line ? So if the PE is 20 or 15 – what would one do and why ?
But the concept looks nice to me…
@Radhey Sharma,
Thanks for your reply. The way I see it, it could be done two ways:
1. Do it on the basis of Nifty PE bands – Say 75% equity for PE 5 to 10, 80% for 10 to 15 and so on. P/E is mean reverting so you would not be very far away from buying in dips and selling on highs.
2. The second way which I have been trying out is to arrive at the asset allocation percentage based on the 5-year percentile of Nifty P/E. This is slightly more complicated but then takes into account the long term P/E history without constraining itself to raw P/E values.
@Ganesh,
For point 1, I meant it the other way around. You would be lower in cash if the P/E is lower 🙂
@Ganesh, Yeah, the first point is simpler.
As long as this is linked to the risk profile (and age) of the investor, it should be fine.
I think the second point, though complicated, seems a bit more mature to me.
How have the results been on your own case ?
@Radhey Sharma,
Have used the second approach for a few months now and it does seem to work well. This is how I use it:
Min equity % – 70%
Max Equity % – 95%
I then take the Nifty P/E values for the last 5 years, then find the percentile value of the latest P/E. e.g. today’s PE is 18.44 which means my equity % should be 90.4 %. I am currently on 85% so I should be transferring Rs. x from my debt MF to equity MF.
Would be happy to share the spreadsheet I use to calculate the equity % in case you are interested..
@Ganesh, Yes Ganesh, I want to have a look at it, please send it to planner@thewealthwisher.com
I think the crash is going to be bad this time. The world markets are all falling. Many investments went dowm…
@Javed, Play safe with mutual funds !!! How much did you lose ?
I think its bad days for the stock market. I am not sure why we have to pay up for the US’s problems.
My stocks are all down…
@Mohit, When did you buy your stocks ? Are all down ?
The stock market is going to slip (not exactly crash – don’t curse me ;)) and will not be up in short-term, so people waiting to invest before it just go up, would not get that chance so easily.
Though long term investers should smile and keep continue SIP in MF/Stocks should increase (for 6months to 1 year) if they can. Given some time anyway market is going to gain.
@Chirag, Well yeah, in a way you are right. I agree that long term investors should keep smiling.
Hi Radhey,
You are right, the markets have tanked again in opening trade.
Do you know where this will go ? Do we sell our stocks or buy more ?
Which ones do you recommend ?
@Lokesh, That is the golden question everyone wants an answer to. Let me know when you get one !
Does anyone know why the IT stocks are being going down…all are down nealry 15% now….I have infosys…
@Chetan, I recommend you check the economictimes and moneycontrol for more information…
Hi all,
As soon as the news flashed about the decline in the credit rating of the US, the share market of different county registered a downfall. Same is the case with India. As soon as the market open BSE registered a downfall the top losers were the three top IT companies, TCS, Wipro and Infosys, witnessed a huge fall in their share prices in morning trade on the BSE. Weakness was seen in the stocks of other IT companies as well, with Tech Mahindra, HCL Tech and Patni Computer losing up to 7 per cent in early trade. TCS, Infosys and Wipro rely on the US and European markets for about 60 per cent of their revenue.But I feel it will not stay for long and India will overcome it soon. Read More click on this link – http://sawaal.ibibo.com/news-and-current-affairs/stocks-including-biggies-like-wipro-infosys-fall-sharply-due-us-crisis-going-get-bigger-1690313.html
@rahul, Thanks Rahul for the explaantion. How soon do you think India will overcomes this ?
This is not the time to panic. Keep buying at every fall for long term and you will be rewarded.
Rakesh
@Rakesh, Exactly. That is a very wise suggestion. Buy low, sell high.
Considering this recent fall to the extend that the sensex is now below 16000 level, how long will be the period taken to reverse/return back to normal ? Can we expect a turnaround in near future ?
@JACOB, Wish we knew Jacob. I do not think people know for sure, they only predict !
By the way, I would not be concerned about this fall at all. If you are investing via the SIP route of MFs, be calm. If you do direct stock trading, need to understand why ?
@Radhey,
2008 crash taught me that patience is virtue. Even though the 2011 crash has taken a beating on my portfolio, I still believe that India is good long term story minus corruptions/scams.
Rakesh
@Rakesh, I am in the same boat as you are.
@Radhey Sharma, I guess this “learned-from-2008-crash” boat is actually a ship and carries almost everyone from the investing community…minus the few who abandoned their journey altogether.
@Jaswinder,
Nicely said but should be the other way round. Only few from investment community are carried and most of them abandoned their journey. Indian investor does not have patience and panics very fast.
Rakesh
I think it is untrue to say that India is one of the growing nation . if you see the present situation of country its terrible. share market for the last five year gives negative returns. Indian rupee is depreciating at a high pace. Really it is shame on whole nation and people that country is still known for corruption and black money holders. government is still sleeping. oh god save india because you are the last hope for us.
Why shame on whole nation and country people because of a handful corrupt people?
And God help those who help themselves so if you want God to save India, first you have to start saving India.