During turbulent times, one must always stick to the basics. Excessive noise should be removed, and only the nuts and bolts of the case should be examined. An apparent obsession with in-depth analysis can lead to either hyper-action or paralysis in investment or portfolio decisions. Instead, this exam should be viewed in conjunction with an aerial view perspective from above so as not to miss the bigger picture. A MECE (mutually exclusive, collectively exhaustive) analysis will cover both of these aspects, although cannot afford to miss correlations and sensitivities between some of the moving parts.
1. Be objective and rational while making decisions
On a related note, behavioral biases should be examined in challenging situations. One should always try to behave like a typical rational human being and take decisions objectively rather than reacting to the news flow or market reactions. Utility functions and equivalent fixed returns ideally should not deviate significantly from Bayes’ theorem-derived expected value (return). However, individuals often display risk-averse behavior, rather than risk-neutral behavior, which needs to be moderated, especially during times of testing.
2. Stick to your asset allocation policy
Investors should always stick to their asset allocation policy including their SAA (strategic) and TAA (tactical). The SAA will often stay the course even during turbulent times and generally covers the long-term needs and requirements of the investor. Volatile times may call for minor changes and adjustments in the TAA so that any mispricing opportunities or perceived risks are capitalized or marginalized, respectively. Diversification between asset classes, sub-asset classes, managers, instruments and geographies remains in focus.
3. Conduct Due Diligence
Taking adequate precautions is paramount; In times of crisis, the help of the right subject-matter experts also pays dividends. While seeking excessive confirmation or data mining to fit personal beliefs should not be encouraged, a uniquely measured amount of consensus gauging can help an investor make well-informed decisions. This is probably a good starting point for astute investment managers.
4. Validate the margin of safety while investing
While verifying the margin of safety is always important for investment decisions, it is more important during chaotic times. At such times the risk of permanent loss of capital due to disruptions due to structural changes in trading and macro conditions may be real. The value available to investors should be examined at the current price at the time of investment, after adjusting for market opportunity and realizable earnings.
5. Build a buffer corpus
Liquidity management is a very important aspect for investors in general. Liquidity holds the key to adapting to market opportunities from time to time, especially during volatile times. Adequate buffer will prevent untimely exit from existing allocations to meet needs or participate in market opportunities. Planning a separate investment policy for such a budgetary reserve fund usually entails resorting to institutional funds such as sovereign budget stabilization funds, pension funds or savings funds. Last but not the least, as the famous saying goes “The will to win is important, yet the will to prepare is important.”
Author: Rajesh Cheruvu, Managing Director & Chief Investment Officer, LGT Wealth India
catch ’em all business News, market news, today’s fresh news events and Breaking News Update on Live Mint. download mint news app To get daily market updates.