Stock market is mirror of an economy. All the activities of market directly affect the stock market. Investors are in confusion when there is chaotic situation in market especially pandemic. There is high volatility in Nepalese stock market due to this situation. Investors have three options – invest, hold and redeem in this situation. As a investor one should keep in the mind that no situation remain forever. We have been through great depression. And the memories of swine flu and zika virus outbreak are still fresh. It is important to keep calm and do not redeem your investment under pressure. There is saying of great investor Warren Buffet “ if you cannot control your emotions, you cannot control your money.” As investors are worried about their investment there are few tips that equity investor need to know.
Should you invest?
This is not the first time we have faced this situation. Recently we have come from First wave of COVID. Our economy has faced earthquake and political turmoil. Even after these situations stock market have emerged stronger. This is very good time to increase your investment as the cost of purchase is low. So your overall WACC comes down if you invest in stock market correction.
Redeem, if you can book profit?
Redemption is to be done only in two cases. If you have earned good profit out of your investment or if your need money urgently. There is popular misconception regarding redemption in market crash. But the market crash is the best time to invest for long run investor. So never redeem the investment in market crash rather add the stocks in your portfolio and decrease the overall costs of investment. It is important to remain calm if situation is unfavorable.
Harry M. Markowitz originally proposed modern portfolio theory in 1952. According to him “ if the correlation between two securities is perfectly positive, there will be no benefits of making portfolio formulation of such securities”. It is because it is just like putting the eggs in two baskets tied together- the fall of one basket is accompanied by fall of another. Hence, as time goes by some stock will over perform or under perform as per market condition, like the current Covid situation. Therefore your portfolio needs good diversification including all sectors. Hence, you need to revisit your portfolio time to time to match with market goal.
It is always good decision to invest more during market crunch. It will help the reduce the overall cost of portfolio and will provide benefit when market resumes stability. Some of the safe investment options are :
- Blue chip stocks
- Mutual fund
- Debt funds
The corona virus has hit hard the global economy, but will get through this. Do not panic and redeem your investment in this situation just because of fear of pandemic. Investor shall look at equities and allocate capital which is not required for at least another 1 year. (Raju Raya – Assistant Director at NRB)