The Greed And The Fear Factor

This is an investment term which characterises market sentiments, and I have actually seen this phenomenon playing out in the world of investments. Let me try to paint a picture of the current situation in the markets. The rupee is at a low and India’s current account deficits are at a high. The crude oil prices have soared. Foreign institutional investors have been steadily taking out money from our markets. The flows into the mutual funds have ebbed. Overall, it is a pretty gloomy picture I would say. And with the state elections and then the general elections around the corner, the markets will continue to be depressed and it will remain so until these events are over and the situation settles down.

So, my dear readers, you might assume that it is a wrong time to invest your hard-earned money, right? I am no oracle but would like to maintain that there can be no better time to invest. Do I hear you ask why now? Well for starters, the net asset values have plunged and the markets are at a discount. Second, what goes down has to come up someday and that’s when you will get a good return from your investments. I am not recommending to go bottom fishing but to keep investing at these low levels. The stocks are at a discount at this time. I would personally invest at these levels, as there is more headroom for growth than when the markets are at a peak!

My chart (below) typically depicts the “fear and greed” factor which works in our minds during such volatile times. Many investors make the mistake of buying stocks at the peak of the market only to pull out during the period of volatility. And often they are at a loss. There is an adage which goes - this too shall pass - but unfortunately, those investors who have pulled out their funds will not be there to enjoy the growth when the crisis is over. They will again buy when the markets are at a premium. Does this kind of behavior seem rational? Always remember, we have invested for a long period hence these intermittent periods of troughs and peaks should not bother us much!  On the other hand, when the markets are at their peaks, we should try to withdraw the profits and keep it aside to invest it back when the markets go down again. However, this is easier said than done. The prudent thing is to stay invested until our goals are achieved. That way our investments will grow for us to reap good returns. As Warren Buffet puts it - “be fearful when others are greedy and greedy when others are fearful.”

Usually, we are guided by market situations rather than our own goals and risk appetite. The “fear and greed factor” hits us more when we take stock of our investments more often than needed.  I suggest that you should stick to your funds, come sunshine or the rain, because the more we look at our investments the more we are prone to take irrational decisions.

I reiterate like I have mentioned in my earlier articles, mutual funds are not instruments of action rather they are a passive fund management system for the investor. If you are seeking thrill, please invest into the stock markets directly provided you are prepared to take more risks. Let me assure you that before we realise that there is a storm, the fund managers have had sensed it brewing and taken remedial actions. Do not worry with mutual funds, you are in safe hands.

The author is a wealth advisor and Founder, Tangerine Ideas