It's challenging time for stock investors

Knowledge could be acquired, but not wisdom. We tend to pick the data and analyze on paper to arrive at decisions. This mental modelling is good as it gives us the directions and cues to act but it can't really replace the experience. Many of the current crop of investors have not even started to invest in equities, etc. during the last big mayhem that happened in 2008. The market volatility was so high and seemed that there was no tomorrow, people sold riskier assets and lost huge sums of monies. After 11 years it turned out to be a mere blip in the history of stock markets while we're experiencing another such turmoil.

While those of the minority who've witnessed or participated in the great financial meltdown would like to draw parallel to what's currently unfolding with the pandemic crisis now, the rest of the people have prepared on paper through their mental modelling, simulations or risk profilers. It's not that all those experienced in the earlier cycle would be immune to emerge unscathed, but they do at least know how they'd reacted then and figure out what emotions would envelop them now. As Voltaire said, "History never repeats itself, man always does".

History doesn't help us to look back and tell us what's in store for us but could help us to know how vulnerable we are to our emotions and reactions. So, as we try to juxtapose this situation to our known history i.e. of 2008 financial crisis or 9/11 event or even with the previous virus outbreaks (Spanish flu, Ebola, etc.) we may conclude that none fits the bill as the circumstances changed a lot.

The pause in the economy now is quite different from that of 2008 or whatever we'd experienced earlier including the World War II, while the policy response across the govts have been much larger and also swift.

There's so much chaos insider our brains and so much noise outside. It's difficult to distil the info and remain sane in these tumultuous periods. I was inundated with numerous calls and mails on how I should respond to protect the portfolios from the drawdown. The market gave less chances for exits though most of the portfolios are relatively less affected due to the strict adherence to asset allocation. There was a very brief period when all the major asset classes including gold was on a downturn, though. It was difficult to remind the investors about the big picture and the benefits of long-term investing.

As Jim Grant said once, 'Successful investing is getting others to agree with you, later'. There were calls of moving completely out of equities only to re-enter later at lower levels. I could only reason out it could turn difficult to time the bottom and may be the markets would give no time to enter (like how it provided no time to exit during the precipitous fall). I'd like to remind why it helped them to stay invested in the market to recover part of the losses during the recent pull back.

I tried to reason that certainty especially opinion of certainty is dangerous in investing. As this could lead to enthusiasm and overconfidence which allows to make more risks, otherwise not even considered. While uncertainty is painful and confusing, it makes us to stay alarm and assess risk better. The current market scenario is turning into a challenge and to counter it one needs to look at their priorities.

Cash certainly is premium at these times, could be considered as a position also. It not only helps one to offset the losses but gives the freedom to grab the opportunities that are presented during these volatile times. It also gives cushion to our thoughts while helping us to align with our goals. If one is not comfortable with the equity markets, then one should realize that it's not the problem of the asset but it's our understanding about equities is incorrect. True, that the pace and momentum of fall this time is spectacular and threatening but that shouldn't alter your risk perspective towards the equity.

Successful investing requires resolve and it's not easy to look through the mazes particularly when the markets are capricious. Both in life and investing, one has to realize that risk and uncertainty are inescapable. In these difficult times, one has to ensure their safety and health, check their cash reserves and reiterate their commitment towards investing through time tested means of asset allocation, systematic investing and diversification that suits their risk profiles.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at knk@wealocity.com)