Investors believe that their investment strategy should constantly change in line with the news that is coming in
When we started our advisory practice over fifteen years ago, the most critical information, local or global, tended to flow in a fairly straight line. The most important news was announced first through a press conference/press release, followed by an analysis on television and in the print media on the implications of the event. Most announcements appeared to be well thought through and deliberated before being released in the public domain, and reversals of decisions taken were less common. A large number of our NRI clients, very often, waited for us to share information with them. Or, they hoped to get updated from their friends/relatives in India on changes that were announced in India and those that could impact them.
The changing tide of news flow
As we moved into a more VUCA (Volatile, Uncertain, Complex and Ambiguous) world over the last few years, businesses found it challenging to take long-term decisions. With social media starting to take over as a primary means of communication, we are also now inundated with significant announcements that could change the world and local economies with just 140 or 280 characters. There is then the flow of information, analysis and headlines, all struggling to answer the “ whys” behind the announcements, even though the “what “ is splashed all over in a few minutes. Very often, our NRI clients ask us India related questions before our domestic clients do!
In a VUCA world, amidst constant news flow, many investors – NRI and domestic – also believe that their investment strategy should constantly change in line with the news that is coming in. For example, when there is news of a slowdown in Indian GDP growth, India exposure should be reduced dramatically till growth comes back, and deposit/fixed income and gold exposures should be enhanced. In much the same way, if there is fear of a global recession and inversion of the yield curve, money should completely move out of equities, and into bonds and gold to protect downsides. Equity exposure should be increased once the recession is over and the economies start to do well again.
We do believe that whilst there is a critical need to have flexibility in the investment strategy in a VUCA world. However, even in a world where twitter announcements can cause movements of billions of dollars of liquidity from one asset class to another, or one geography to another, it is also equally important to remember that not every announcement is likely to remain as is. There could be changes or modifications. Besides, every announcement is not as big as another and, therefore, the implications of the same need to be well understood before taking any portfolio action. In addition, timing the entry back into the asset class at the right time can be very tricky, as returns tend to be very lumpy, for example, in equities.
Modifying portfolio allocation
Just as it is critical to analyse why a certain announcement is being made, it is also important to understand the longer-term impact on the investment portfolio. Avoid getting carried away by the noise and the negative news flow around, and stay focused on financial goals.
Slowdowns tend to be the best times for investors to accumulate growth assets such as equities, especially if they believe that their professional incomes are fairly stable and unlikely to be impacted by what is happening around them and if they do not require the monies in the short term. For example, for investors who are saving towards goals such as retirement or education of children that are 10-15 years away, they may use potential slowdowns to enhance their savings, to make up for the potential lower rates of return that are likely to accrue for a few years when things slow down. Similarly, when there is a booming economy, it is a good time to look at less risky assets, as equities can become very expensive. Equities are forward-looking, and tend to discount the future fairly rapidly, both in good and bad times.
Investors may also wish to look carefully at the expenses of their portfolios during times of a slowdown, to help keep their portfolio returns intact. A combination of active and passive mutual funds, for example, can work well to keep a good balance of returns and expenses.
Avoid hyperactivity on your portfolio in a hyperactive world, and stay focused on the changes in your financial goals, if any.