Why sell now, buy later may not be the right strategy in this market

The pain is more severe for broader markets where the midcap index has plunged more than 13 per cent, while the smallcap index is down by 17 per cent. Both the indices have plunged about 20 per cent from their 52-week highs, signalling they are in bear grip.

For context, NASDAQ is already in the bear market territory after falling more than 20 per cent in the last six months which is spooking investors, especially amid looming recession fears.

Investors who are wondering whether markets have bottomed out need to keep in mind that it’s hard to make such predictions. Having said that, there’s a likelihood that markets will fall even further before it gets better.

Indian stock markets are still expensive on an aggregate basis notwithstanding the higher growth that India is witnessing versus other emerging markets. Countries across the world are now targeting inflation by raising interest rates to counter inflationary pressures.

Take the US, for instance.

Till around six months ago, the world was debating whether inflation in the US is “transitory” or “structural”. Then we witnessed what no one imagined – the Russia-Ukraine war, that has put energy prices into another . This was against the backdrop of a very sharp rise in metal prices globally anyway over one year.

It is evident now that the inflation monster is here to haunt the world for good, which would trigger central banks globally to raise interest rates. The US Federal Reserve is expected to do so too, and the dollar is now at a 20-year high as more money is pumped into the greenback in anticipation of this.

Brazil and Australia both have raised interest rates, and the Norwegian central bank has said it intends to raise rates next month.

So as markets tumble with rising interest rates, should investors sell now and buy again later?

Absolutely not! That would be a very bad decision for your personal investments. The decision to sell now and buy later emanates from a delusion that many investors have on being able to time the market accurately.

In all the large crashes that we witnessed in the past, many investors took this call to sell the dip and buy again when the market hits the bottom, only to regret it later for not being able to time their entry.

It is par for the course for stock markets to drop after a steep rise. Markets tend to overextend on both sides. Till around one year ago, everyone was having a gala time in stock markets and everything that investors touched turned into gold.

That made more investors get in and markets went up further. That became a virtuous cycle that fed into the market rally. This process just needed a trigger point to self-correct. The market overextended itself in last year’s rally and this correction is just taking that froth away.

Where should investors put their money then?
Long-term investors should stay the course and follow an asset allocation approach to investing in multiple assets like equities, debt, gold, REITs, etc. In fact, the current correction is good news for genuine long-term investors.

The single biggest hindrance to investing in good companies is that they are never available at a reasonable valuation in normal market conditions.

Such geopolitical or macroeconomic reasons that lead to index-based selling across countries turn your portfolio returns ugly. That is when the weaker investors move out of the game.

As a long-term investor, I keenly look for opportunities like these to optimally add incremental cash/debt into businesses without worrying about how the indices will do in the next six months to a year.

Remember, good businesses offer a certain value to their customers whilst growing their incremental cash higher than the risk-free rate of return (for simplicity consider this the FD rate) consistently, year on year.

When the risk-free rate of return goes up (like now), they need to do more hard work to sustain their growth rates. Larger, organized, professionally run businesses can navigate such times much better than the smaller, unorganized ones.

(Vishal Vij is Founder & Managing Partner, Nestegg Wealth. Views expressed are personal.)