Is 2011-bloodbath on cards?
Prescription to a disaster is that one should not add to his losing position and remember that standing aside is a position and often the best one to take if one cannot form an opinion as to where the market is heading on a given day.
SO, it is yet again not a good time for investors. Last Friday, the fall in US markets that contributed to the downfall of the 30-share Bombay Stock Exchange benchmark, as around 12.30 pm it even plunged below 17,000 for the first time since May 2010. The Bombay Stock Exchange’s Sensitive Index fell 387.31 points, or 2.2 per cent, to close at 17305.87. This was the lowest finish since June 11, 2010. On the National Stock Exchange, the 50-stock S&P CNX Nifty fell 120.55 points, or 2.3 per cent, to close at 5211.25.
An estimated amount of Rs 2,50,000 crore was wiped off from the total investors' wealth, measured in terms of combined value of all listed stocks, in just about three-and-a-half hours of trade. And this was enough to trigger a panic among investors
The market sentiment on Monday continued to reflect panic among investors as a downgrade of US credit ratings by ratings agency Standard and Poor's triggered another sell-off on the Dalal Street. The markets sold off for a second consecutive day on Monday, as panic investors dumped equities in favour of safer assets. The Sensex slumped 315.69 points to end below the 17,000 mark but the Nifty managed to hold on to the crucial 5,100 mark, falling 92.75 points.
The tumbling stock market has yet again initiated a need for investors, at least in the local context, to be more open to a stable option that is not so volatile and risky. This situation has definitely shaken the confidence of our (J&K) investors. Currently, the panic in the stock market has yet again put the local investors in dilemma seeking plenty of opinions about the future behavior of market.
Following the current market crash which indicates repeat of 2008 bloodbath, I too have been receiving queries about the market direction in the coming days. No doubt, I do have plenty of informed opinions, but at the end of the day they are just opinions. And is no surety to get stellar results. The reasons are simple. Firstly, investing in the financial markets involves buying and selling and to make a profit one has to get both decisions precisely right. Secondly, to buy and sell the stock successfully one must be able to monitor and interpret countless pieces of information that can change in a heartbeat. And, thirdly, when the market has its ups and downs, emotions can easily cloud ones judgment.
So, in the given scenario, it’s the investor’s balance of mind which can insulate him from disastrous impact of the current crisis. It’s the fear element which needs to be arrested by the investors. What we have seen that most of the time it is the fear element which has not only shaken the confidence of those who are even fine minds in stock markets, but many would-be investors too simply refuse to enter the stock market, because of the risks involved. Their fear is a stock market crash. It is true that such crashes can happen anytime, but the thorough understanding of the markets with emphasis on causes of a crash and its effects can help set investors’ mind at ease. Precisely, it is the knowledge management about the means of investment which can help an investor while investing properly.
In many cases, it is investors themselves who contribute to a crash. Investors may borrow money to buy stocks or may invest in stocks without thoroughly understanding the stock market. They buy stock in the hopes that it will increase in profit. When some sort of economic news seems to suggest that they will lose money, again, they often rush to sell their stock, driving stock prices down. In a market crash, it has been observed that the investors who are not disciplined and who do not understand the market are among the first panic and try to sell their stock, pushing a temporary downturn into an actual crash.
Here the tumbling stock market has initiated a need for investors, at least in the local context, to be more open to a stable option that is not so volatile and risky. While realizing the fact that gold is on a rush at the global level, local investors have an opportunity to add gold in their portfolio. The experts point out that the basic reason is that gold prices are going through the roof because of high demand and stable-to-low supply. The downtrend in stock markets has given a space to look beyond equity market and consider the role of third asset to bring down risk at the same level of return or even increase return at the same level of risk.
To be precise, diversification of investment portfolio is important. One should have different kinds of stocks in ones portfolio, as it mitigates risk to a large extant. Most of the time, all the stocks in ones portfolio will not move down in a crash. An investment portfolio is efficient if it contains assets like stocks, bonds, real estate and gold that do not move up or down together.
A disciplined investor should not take decisions which are based first on greed, then fear. Otherwise, one cannot accurately weigh the risks versus rewards. Losses hurt more than gains help. There are plenty of opportunities in today's markets, but one has to maintain a disciplined approach when things get rocky. Staying diversified is the key to not only surviving but thriving in the financial markets.
Meanwhile, there are expert opinions which suggest that if the markets on a given day are not performing or reacting the way one expected, it is best to simply get out. So, prescription to a disaster is that one should not add to his losing position and remember that standing aside is a position and often the best one to take if one cannot form an opinion as to where the market is heading on a given day. It is noteworthy that one should not try to profit on every trade. It is the total profit you make that matters and remember the market is always right.
It is also noteworthy that the Reserve Bank of India is 'continuously assessing impact of current US crisis' and the apex bank has already stated that India is not insulated from global developments like the downgrade of the United States. Pundits have started forecasting the Sensex to plung to 15,000 in the coming days.
(The views are of the author & not the institution he works for. Feedback: firstname.lastname@example.org)
Lastupdate on : Mon, 8 Aug 2011 21:30:00 Makkah time
Lastupdate on : Mon, 8 Aug 2011 18:30:00 GMT
Lastupdate on : Tue, 9 Aug 2011 00:00:00 IST
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