I have attended a panel discussion at IIT-Roorkee on Investors Behavior during Financial Markets Crisis. The aim of this discussion was to look at the kind of change experienced in behavior of investors during such crisis and how it impacts their investment strategy for the future. Here, I am presenting my views which I have put forward in this panel discussion.
The Behaviour That Impacts
1. Change in Risk Tolerance– The risk tolerance of investors experience a change during these situations. Many investors would have invested in equities for their goals but during crisis there is a panic environment and so the level of risk tolerance decreases. The objective changes from growth of money to protection of capital which ultimately leads to panic selling.
2. No Rebalancing– During financial crisis very few individuals pay attention to their investment portfolios. When markets movements are not very large there is no review of the portfolio allocation which may have an impact on the asset allocation. But the same investors tend to panic when markets movement are too large, as was experienced in 2008. This panic leads to actions like moving money from equities to cash or bonds and in recent times, in the instrument such as gold. However, an individual portfolio allocation may be more relevant during such crisis but very few investors do an analysis to find out the same.
3. No Research– The research and analysis almost vanishes during these crises. The attention gets shifted to the news and rumors which is spreading around. To recover losses, investors start chasing high return investments and other factors such as expenses of the investments takes a back seat. This ultimately becomes the reason of portfolio under performance.
These behaviors are very common and have been experienced globally in different market cycles. There is no different strategy one can implement during such period but by simply keeping the basics of investing intact one can ensure these crisis can be turned for an opportunity.
1. Keep long Term Investment Intact– The view of long term investing should not change. The more volatile asset classes have historically produce good returns in the long term and so one should continue to invest even if such crisis occurs.
2. Do Not Follow Rumors– Rumors are spread as fast as investors can imagine. But they are rumors and will not fit to your financial situation. Avoid any such rumors which can lead you to overreact and indulge in frequent trading. You might fall into a situation when, as the tide turns, you have only those assets which do not rise with markets.
3. Review Your Portfolio– Rather than giving a paralysis attack to your investment portfolio sit down and review. Look at your asset allocation and rebalance it if required. You can buy more assets which has lost its value more. This way you will be able to keep your long term goals intact.
4. Choose an Advisor Wisely– During crisis you are more comfortable with an advisor who can address your behavior aspects along with your investments. Search for a good advisor or if you have identified one discuss with him your portfolio.
Financial Crisis sometimes brings lot of opportunities for long term investing. But you need to have your research in place to grab this opportunity and have to move out from behavior changes by reviewing your financial portfolios in line with your goals.