You know many have likened this 2020 market correction to that of 2008. In my view, it is nothing like it. It’s far much worse!
No, I am not talking about Market Cap to GDP Ratio or the steepness of the preceding rise before the fall or the state of the world economy.
I am talking about you the investor. The person who thought he is putting money to work only to see it go down in value like the proverbial ‘9-pins’ .
In 2008, the no. of investors compared to today were few and the size of the investments exposed to the markets was smaller.
One of my investor clients had less than 5% of his net worth invested in the markets in 2008. And there were no online portfolio trackers too.
2020 is a different era. The same investor today has 50% of his net worth in stocks/mutual funds and there are portfolio trackers to view daily changes.
There is a
red sea of difference between a Rs. 80,000 drop in value and a Rs. 80 lakh drop. The latter feels like falling off a cliff.
It’s damn scary. I mean it could push you away from the markets forever.
If you are a braver soul or you have an advisor on your side, this could turn into your graduation exam. If you can survive this trial by fire, you will be awarded the official INVESTOR degree.
The new investor in 2020
There were investors who took a lot of time after 2008 to become comfortable to invest back into the markets. Oh yes, they had deserted then and vowed never come back.
Well, never say never.
An investor did just the same.
As time flew, he became hopeful and decided to invest again. However after waiting for a couple of years when no action came through from his side, he recognised his limitation. He decided to take help and hired an advisor.
The advisor worked with him on his plan and the asset allocation. Investment choices came up and an action plan was drawn. It was clearly specified that since he is almost like a new investor, it would be better to take small steps and not expose big right away.
Let the market exposure be gradual.
The investor had already lost so many years and to wait for more didn’t seem like the right kind of thing.
Why not go all in now?
He wanted to take the big plunge. The recency bias (of market gains) was weighing on his mind.
With some consultation, he reluctantly agreed. Slow and steady is the way. He followed the plan. This was January.
Some portion of the portfolio was invested lumpsum into mutual funds. Rest in debt funds. To be deployed over a period of time. SIPs were triggered too.
All good until March marches in the big market correction. We discuss. Some more money is invested from the debt funds.
Markets correct further. Recency bias sets in again. Investor feels that he should have waited and not invested earlier.
He is the same person who wanted to go all in, in January. He is already better off because he did not do it then. ON the bright side, his last week’s purchase was at much lower prices than in January. And yet!
No, this is not finding fault. There is a lesson.
The big lesson
One thing is clear, investing is not as much a game of numbers as it is the game of the mind. There was 2008, there was 2017, 2020 and before the decade ends, you will see another, most likely.
As the learned have said, investing success comes from temperament, patience and willingness to suffer pain.
Markets put you to test this again and again. Remember, you will likely never be able to guess the markets. Market has its own mind. With that understood, you know you can’t control it.
What you can control is what you do. Save, insure yourself, set aside an emergency fund, invest systematically, over a period of time, follow an asset allocation, rebalance and do things that truly make you happy.
Let this 2020 fall be the last you have worried about.