Whenever the words ‘recession’, ‘market downfall’, ‘global economic crisis’ come in picture, I think about Mr.Rudy Giuliani, the mayor of New York, when the twin towers were hit on sep 11th, 2001. He was put under a situation where he was blamed for unpreparedness, death toll increasing everywhere and people all around the globe looking at him with different emotions. The way he handled the crisis amidst political, global pressure and his personal issue of fighting against prostate cancer, it is just amazing.
Because of market euphoria, investors start thinking, “this time it is different. The things will be very rosy hereafter”. Don’t think like that. There could be recessions or market crashes anytime. Are you and your investments, well prepared for it? How can you cultivate similar emotional strength as of Giuliani’s while facing the recession and market declines? Read on to learn more.
Why does the market crash?
No one had any clue about a terrorist attack on twin tower and followed by a huge crash in the market. Always expect the unexpected market crashes and better learn to accept it too.
Do you know the most common reasons for market crashes?
At times, wrongly spread information make the traders to sell off the stocks and creates panic attack in the market.
Apart from recessions and global economic downfalls, the fraudulent activities like the Harshad Mehta scam (he used the flaws in the system and created an artificial bull market, then market crashed heavily when he get caught) and Satyam scandal (the stock value differed from the book value and market crashed when its MD Ramalinga Raju get caught for fraudulent activities) played major roles for market crash.
The ‘famous’ product collapses like housing bubble in the USA, and the dot.com bubble of recent times take a solid part in market downfalls. There are political reasons (unexpected defeat of BJP in 2004), natural disasters (Tsunami, Japan earth quake), terrorist attacks (Twin tower attack, Mumbai Taj hotel attack) are the reasons created unexpected impacts in the global market.
Do you know the best unknown secret to invest on stocks without worrying much about risk?
Did you know the shocking news when approximately 23,000 Americans committed suicide after market crash in 1929 and continued in 30s? The October 24th 1929 is still known as the ‘Black Thursday’ in market history when Dow went down by 23%. Winston Churchill who visited New York, a week after the crash, witnessed an incident where an investor who lost hugely due to the market crash fell from the 15th floor and went into pieces. This was noted in Churchill’s diary as well.
These kinds of suicides happen in each and every market crash. What is the reason behind these suicides? They are over exposed to the stock market. They have invested in stock market beyond what they can afford financially and psychologically.
Say, you have 10 lakhs to invest. Because of market crash the 10 lakhs can erode in value. Are you financially capable of absorbing this capital erosion? This effectively takes you to the assets allocation. How much money you need to invest in safe assets and how much money you can invest in risky assets? Don’t get over exposed to the market at any point in time beyond the pre-determined asset allocation.
Are you psychologically prepared to take risk? Up to what percentage of loss you are comfortable to tolerate?
Unless you get clarity on how much risk you are comfortable in taking financially and psychologically, you will not be able to proceed further. The soiled mirror never reflects the rays of the sun; similarly those who are not clear about their risk affordability and tolerance are deluded by the illusion of market hype. They will never reap the benefits of the stock market.
Stock market is not for short term investments. Is it so?
Ok, you have invested ‘X’ amount in stock market by keeping ‘Y’ amount in other safe investments. What should one do while market crashes? Just wait for the market to revive back.
Lehman brothers had to close its sub-prime lender due to mortgage crisis. The increasing subprime mortgage misdeeds and foreclosures resulted in decreasing securities backed by these mortgages led to huge loss to BNC mortgage, a subprime lender of Lehman brothers in 2008. Investors hurried to sell those stocks and the market crashed. Look at what happened just in three years for those who waited patiently with the stocks. The stock values returned to 100%. Imagine what one will achieve if wait for few more years. Success seems to be largely a matter of hanging on after others have let go.
Stock market like Phoenix gets back to shape in a matter of time. If you invest your short term money if market crashes, then you may not be able to wait till it recovers and you may be forced to book loss. Invest only your long term money in the stock market.
Are you matured enough to handle the market crashes?
If you are emotionally matured, market crashes will not disturb you. If market crashes are disturbing your inner strength then you are not emotionally matured. Peter Lynch rightly said, "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." How the market works is unpredictable and no one can predict the impact when market falls down.
You have got 2 options. You invest in the stock market only to the extent that the market crashes will not disturb you. The second option is to develop your emotional maturity so that the market crashes will not disturb you at any exposure.
If you follow any of the 2 options, no market crash can disturb you. If you get emotionally disturbed during market crashes, then it is time for you to choose the best which works for you from the above 2 options. Change is the only thing that never changes.
Are you emotionally stable enough to handle the market fluctuations?
Do you want to develop the key attributes to become a strong investor?
Are you ready to make this change?
Understand economic recessions and expect the unexpected market crashes. Don’t invest another rupee until you could do this. Once you could do this, then you are all set to survive from market crashes without any negative impact emotionally as well as monetarily. Also you are well prepared to accumulate wealth through your equity investments.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
CAclubindia
