Simple measures in difficult times

Publication: Business Standard;   Date:Feb 27 2011;                  

The Five questions you need to ask the advisor, or yourself, that will help you tread over current uncertainties

The present year has been a roller coaster ride for investors. Equity markets are turning more volatile each day. Within the first two months, the Sensex has moved between 17,200 and 20,500. There seems to be no respite from this, as oil prices are moving up due to unrest in the Arab world. They recently touched $120 a barrel, a 30-month high.

Commodities and debt are on an upward spiral. Gold and silver made lifetime highs by crossing the Rs 21,000 per 10 grams and Rs 50,000 a kilogram. State Bank of India recently launched high coupon 10-year (9.75 per cent) and 15-year (9.3 per cent) bonds. There are expectations that interest rates could inch up further. This means that interest rates on loans will go up as well.

Real estate prices though stagnant are still high. To make matters worse, Reserve Bank of India (RBI) has made it mandatory for banks to lend only up to 80 per cent of the house value. This has made homes beyond reach of many individuals.

If you are fretting about your goals in the present environment, you are not the only one. Many investors are worried about the future. Obviously, a person cannot fulfil goals on debt or commodities that are not tax efficient. In addition, they may even correct if government take corrective actions or geopolitical situation change.

If you have a financial advisor taking care of financial matters, or even if you manage your own finances, answer these five questions. They may put you at ease.

What should I do now? This depends on what your needs and goals are. It is important that your advisor takes stock of your needs first and crafts out an action plan accordingly. There can be various needs and goals for which you might require money after six months, two years, five years and 25 years. Your investment strategy for each of these should be different.

Does my portfolio need rebalancing? This stems from the classic theory of buying low and selling high. Assets that have done well can be sold off, whereas assets that are correcting can be bought. This means that if you had made a real estate investment three-five years back and are sitting on decent gains this might be the time for profit booking. Similarly, if your gold allocation has gone up, sell gold and buy equity. In the current environment, you just cannot ignore debt. A person can increase allocation to it but after considering post-tax returns and inflation.

When do I invest? Volatility can present excellent opportunities in the stock market for long-term wealth creation. However, the daily gyrations of the stock market can make an investor nervous. There are expectations that Sensex can further correct to 16,800-level, or even lower. However, correcting markets and falling prices present opportunities to make abnormal returns over a time. One should, hence, start buying in a staggered way on every dip, as there is no precise way of knowing where the bottom could be. True the prices could still go lower after you have exhausted your cash, but this is exactly how equity markets work. People who have missed out investing in 2008 and 2009 could probably get great opportunities in the near future.

Should I book profit on realty? The answer to this depends on your situation. If you have made property investments long time ago, this could be a great time to sell. However, if you need a place to stay, then buying at atrocious rates today will do no good. Instead, a better strategy is to rent out. Pockets where there is an oversupply of ready properties and under-construction ones should be avoided. At the same time good locations where prices are still reasonable, have under construction properties of reputed builders can be considered as investments if the price is right. There will be pressure on many builders to clear off inventory in the next few months. So, it is likely that there will be price correction in the near future.

Gold and silver strategy? Finally what should my gold and silver strategy be? It should be in line with your asset allocation. Here too, invest in staggered way. The prices of these commodities are at lifetime highs and there can be sharp corrections in prices. Despite all-time high prices, metals can still surprise investors. A prudent strategy, therefore, would be to invest regularly in such investments.

The writer Amar Pandit is CEO, My Financial Advisor

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