While investing in stocks or mutual funds, investors use several strategies. Aggressive selling on a downturn, buying on hints of an upward movement and even investing on hot tips from friends are some of them.
However, a very successful approach that a lot of people seldom use is inaction. This method, if effectively used, can cure a lot of financial headaches.
Basically, when you take a call on selling or buying an investment product, you are giving the signal that this product has completed its shelf-life or will add value to your portfolio. Holding an investment for long periods of time indicates that this investment product is good for your portfolio. There are several situations in which you can use this strategy.
Lack of options: There could be time periods when you do not have a worthy option. Any investment decision is based on expectations about the future performance of the asset class. If there are no such products, then it is best to sit tight with the existing investments.
In such a situation, though it may appear that you are not taking any action, the inaction, itself will help you prevent erosion of wealth. For example, if you believe that all the asset classes such as equities, real estate and commodities are overvalued, then not churning your portfolio at this stage may be a great idea.
Cash in hand: Sometimes, you could have an investible surplus but no opportunities. During such times, it might not make great sense to immediately deploy the funds because the present conditions may not help you to earn good returns.
Yes, keeping idle cash is not a great idea. But then, investment products capable of giving good returns should be available as well. If the expectation is that the investment avenue is good but the time is not right to invest, then some waiting helps. This also implies that there are expectations of a possible fall in the value of that asset. A good example of this situation is when an equity investor has cash and is waiting for the market to stabilise before deploying it.
Short-term volatility: As all investment advisors will say, it is always important to be in the equities market for the long-term for good returns. However, it is noticed that investors exit the market in panic or enter when the market has already peaked. It is important that when you are in it for the long-term, you ignore short-term movements.
Obviously, this means having more patience, a firm belief in your choices and not getting ulcers when the market moves against you. This especially applies when you are following a systematic approach towards investment such as a systematic investment plan (SIP) in mutual funds. A tanking market could really unnerve you. But it is best to just quietly and keep investing.
Remember, falling prices of shares mean more units of the fund. And all those units count in the long run. Also, there could be times when you have particular financial goals and disciplined investment is the only way to achieve them. In such a situation, irrespective of the market conditions, you will need to keep on investing. Following a plan is absolutely necessary to achieve your goals. Inaction, in reality, could actually mean affirmative action in such cases.
The writer is a certified financial planner.
