Controlling Your Emotions

Its been a tough few weeks in stock markets. A combination of things including Greece debt woes, worry over the US economy and China tightening has combined to keep downward pressure on markets. Year to date, a fair number of funds are in the erd, though not by a large percentage. Most are down 5 to 8%.

It is time like this when investors’ patience are tested the most. Take heart in that most people invested into equities. Only those that have stayed in bond funds and short duration bond funds are relatively happy at this stage. Even so, Its not the time to panic. Controlling ones emotions is probably the most crucial at this point. Markets can and will eventually rebound, but selling out when they are depressed runs the risk that when they do rebound, investors will be caught out.

Frequently, when the market rebound happens, there is no particularly significant event that can forewarn investors. Its literally quite possible that 4 months on, we could still be facing the same issues of China tightening, Europe grappling with debt woes and a US economy which is not exactly roaring ahead. And yet, it is also quite possible that with the same environment, there is a market rebound. This is like what happened in 2009. In the aftermath of the Lehman Brothers crisis, the rebound started in March 2009, and yet at that time, was the situation different from 3 months ago in December? It was not.

There was no clear indication at that point in time that the global economy was rebounding. I remember back in March people were still talking about a L shaped recovery. Everyone was still struggling and the economic indicators coming out then were horrendous. Yet, March saw a very significant rebound. And by the time economic indicators appeared which showed a recovery, that was many months later, and a lot of the market recovery had already happened.

Valuations are cheap at this point, and that is precisely because here are so many concerns worrying investors at this point. But this is an environment which an investor should actually be more comfortable with when investing as opposed to one which is all rosy clear blue skies. You know that with the current pessimism out there, you are not buying into equity markets expensively.

Just make sure you are diversified, with a certain amount into bond funds which can given you some stability through this, and wait out this current time. Some of the best bargains are found when people are fearful. And while I would not say that we are at the maximum fear stage at this point, we are certainly further within that spectrum then in the “greed” spectrum currently.