The retail investor and the lost art of investing for uncertain times

Take the first point pertaining to credible gurus. Now, many rely on what Warren Buffett has said. In general, his view has been to be bullish on America, and on American companies. And let all other things be. These include interest rates, wars, and what have you.

This all makes sense until you realize the fact that Buffett is not saying you should be always bullish on stocks. And nowhere does he say that just because America will do well, every company, theme, and segment of the market will do well. He is filtering to an extreme, a point that we often miss.

And of course, don’t forget he does not have to care a lot about war coming to America’s shores. In case you are wondering why, check the map. They are protected by oceans at both ends. On the top sits Canada, a hardcore US ally. And below, is Mexico, a country besotted by its own issues.

Finally, coming to the micro, there’s no need for Buffett to worry about the US dollar. It’s the world’s currency of choice! When there’s a problem in the world, say a war, money moves to the dollar, and not away from it. It’s a safe haven asset after all!

Buffett’s context (of America) is different from ours. Very different. And therefore, unlike him, we need to prepare for different kinds of risk as well, which he can kind of ignore. And there are many such risks all around us here in India which we should factor in.

Next is the misleading statements by fake gurus. Untested, unproven theories peddled by bull market wonders have led many an investor to chase all kinds of stocks, at all kinds of prices (for instance, everyone seems to be a “momentum” investor now!). The net result? The typical Indian retail investor is growing her investments in stocks fast, and that too in the racier segments. As I often quote, one should “never confuse a bull market with brains”. But that’s exactly what’s not happening now.

Finally, the incredible rally in stock prices, aside of the flash crashes, over the last many years has perhaps made investors complacent. No matter what, the markets will go up, so why bother. Remain bullish.

Combine the three—underestimating risk, misleading opinions and the complacent attitude—have almost relegated the art of asset allocation, which helps you achieve your goals while moderating risks where possible, to the bin. 

We are now permanently in a risk-on mode. And this will continue to work till there is a true shakeout in the markets. And who knows, perhaps, the two wars that are raging in the world right now, could bring that on. No one knows for sure of course.

You see, the point is not whether something will happen. The point is that you should always be prepared for it. That’s how family fortunes persist over time.

So, in conclusion, here’s what I recommend you do to prepare yourself for what may be coming next:

First, and foremost, be sure of your financial goals. This is not a very difficult task. Just requires some calculator chops at best.

Second, figure out the path to achieving these goals, i.e. the financial plan.

Third, figure out the asset allocation that helps you achieve your financial goals with the least possible risk. Here, in all probability, you will end up investing across all assets over time. Think gold, bonds and perhaps even real estate among others. And within stocks/equity funds, you will end up diversifying across segments. Think large-caps, which have been relatively ignored by investors.

Finally, set aside funds to meet your short-term needs in case of an emergency. This way, you will not upset your financial plan at the slightest sign of trouble. This is simple, perhaps even boring, but very effective in dealing with uncertain times.

Or you could rough it out in the markets and hope that “be bullish” will pull you through no matter what. It could work. But the risk of failing is more than zero.

The question to be answered by you is whether you want to make that bet—high chance of big returns vs. small chance of total loss. Think over it.

Rahul Goel is the former CEO of Equitymaster. You can tweet him @rahulgoel477.