We observed a unique situation during the COVID-19 pandemic. The virus wreaked havoc with life and the economy. Amid the large-scale devastation, it was surprising to witness a sort of festival in the stock markets. The stock market benchmarks Nifty and Sensex hit new lifetime highs. Veteran investors have been observing cautious approaches while reaping benefits of the surge in the markets while other retail investors are in a merry-making mood giving little or no attention to the risks associated with the surging market. There has been a substantial increase in the participation of retail investors. It’s interesting to note that the volume of trading by foreign and domestic institutions has declined. However, contrary to this, the amount of retail participation has gone up significantly. The market recorded a sudden rise in the number of demat accounts held by individuals, which, according to a report, saw an addition of more than 1.50 crore accounts. Most of the new post-COVID entrants in the markets are first-time investors, mostly lured by the market gimmicks. However, most of them have been enjoying the flight of markets to record-breaking levels so far, despite incidents of fall in different segments of the markets. Precisely, the bull run prevailed in the stock markets during the pandemic.
Now, with the outbreak of war between Russia and Ukraine, the markets have started shaking like jelly. When we look at the performance of our stock markets, we find, as the data showed, The BSE market capitalization stood at about Rs 246 lakh crore on March 04 (Friday) compared with Rs 251 lakh crore in the previous session. This means a fall of Rs 5 lakh crore or $66 billion at the exchange rate of 76 per dollar on Friday. A report reveals that since February 15, the Sensex has lost about 4,000 points and investors have lost $197 billion. “The wealth erosion in the markets was higher than Ukraine’s 2021 GDP estimated at $181.03 billion by the IMF,” says the report.
The war-induced behavior of the markets has left the investors in a lurch as they stand confused by the question about the fate of markets in the coming sessions. Is the bull run saying goodbye or the war is triggering some corrections in the markets? In both ways, the investors are facing a hit. However, the hit on the portfolio of investors will be major if the markets start falling after the summit. In other words, the end of the bull run will subject the investors to suffer for a prolonged period.
Let me quote a market expert. Historically speaking, the experts remind us of the mega bull runs of 1999-2000, 2003-2008, and 2016-2020. After the market peaked, it ended up shedding 53%, 65%, and 40%, respectively. The impact of these corrections lasted for as long as 40 weeks. Precisely, in the historical perspective, markets have erased at least 40% of their gains towards the end of bull cycles. As the war has just begun, there is no question of easing the geopolitical tension. It has already derailed the economic recovery efforts after the pandemic turned every sector of the economy topsy-turvy. The commodity and crude prices are surging only to signal that price rise of essential and non-essential commodities will show no mercy this time. In the context of market behaviour, it would be the intensity of the ongoing war that would be the major influencing factor to see the markets in bull or bear run.
Does this mean the war has put the markets in oscillating mode and risk of losing investment has heightened?
Let’s understand that we all are exposed to risks of negative occurrences caused by external and internal vulnerabilities. However, in day to day life we mitigate these risks through pre-emptive actions. In investment matters, we invest our money to multiply it. But there are certain vulnerabilities which result in the dip of the expected returns. Sometimes the vulnerabilities even cause loss of capital investment. This is the situation which we frequently witness in the equity market. Now the Russia-Ukraine war has complicated the situation. There is an imminent threat of loss of investment. At the moment, there are no indications of the war scaling down. In fact, it has just begun and has already started impacting the global economy with prices of crude surging and only surging. The oil prices are definitely going upwards in the coming times and the inflation worries are going to hit markets and the consumers mercilessly. Amid this developing situation on the economic front, the ongoing geopolitical tension would impact the markets negatively. Experts have already cautioned about the war-driven turmoil in the markets.
So, the risks have heightened in the context of investment matters.
How can an investor mitigate risks?
Generally speaking, risk management is one of the keys to successful investing. To mitigate the investment risks, an investor should normally park his money in different sectors. What I am talking about is investment portfolio diversification.
Technically, investment portfolio diversification is an investment strategy combining a variety of assets to reduce the overall risk of an investment portfolio.
What are these portfolio risks?
There are risks associated with market returns and in investment matters it’s called systematic risk. Interest rates, inflation, recession etc. are the factors which trigger this kind of risk. Then there is unsystematic risk, which is company specific and this kind of risk can be nearly diversified away.
So, how diversification can help an investor?
By distributing your money among a variety of investment instruments that may rise and fall at different times, you will insulate yourself against those big “hits” that your entire portfolio could suffer when one asset class is hit hard. Here it’s important to review your investment portfolio occasionally to check the percentages of your holdings still matching your risk tolerance and time limit.
What I mean to say is that you should avoid putting a large amount of money in a single stock. If you still have an investment in one stock, look for an appropriate opportunity to sell off some shares and move some of that money into other shares. Needless to mention here that investing in high-quality stocks is not so risky and you should also not get dissuaded by short-term bumps along the way.
While diversifying your investment portfolio, ensure you are adding good company stocks to your portfolio. Limiting your exposure to highly risky investment instruments can help you to protect your wealth. In short, you should take the route of diversification to reduce the risk of losing capital when investing. If one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the overall losses of your investment portfolio.
What about investment in emerging markets?
Investing in emerging markets is highly risky. I don’t mean that you should not be a player in emerging markets, but it’s important to first understand the investment outlook, seek the opinion of a market consultant and then take a decision to add volatile investments to your portfolio. Notably, almost every market expert advises investors not to follow predictions. No one can predict with any accuracy what future years will bring to the financial markets. So, always consider diversification, invest in quality shares and maintain a long-term perspective.
Market experts have also endorsed the strategy that by diversifying your investments, you can achieve smoother, more consistent investment returns over the medium to longer term.
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author. The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK