The following note was published to all our clients today
We have feelings of Déjà vu. To know why, read these two updates from March 2020
And
The first post was written deep into the Covid crisis. I used the term ‘Actions in the fog of war’ as a metaphor for decision making under extreme uncertainty. This term is used by generals who make major decisions with uncertain and conflicting information in the middle of a war
We are a literally in a war, except its an economic war on a global scale. It started last week when the US announced tariffs on all countries around the globe. There is a lot of analysis and commentary on it and I will not rehash or analyze it.
I personally think it will do us no good as this is a very fluid situation and who knows how all of this plays out. This could get resolved soon with each side declaring victory, spiral into something worse or we keep muddling through this chaos for the next few years. No one can put any probabilities against each scenario for now. Its too early to tell
Not burying head in the sand
We are however not advocating burying our head in the sand. As we shared at the start of the year, we decided to pull back and went into cash as part of the risk management process.
As the market zigzagged over the last few months, we have rejigged our portfolio a bit and added some positions. In other words, we have not been in a hurry and will take our time.
That said, we laid out a few action items in our posts in 2020, which remain true today. Let me share the same with minor edits
- Please ensure that you have at least 6-9 months of cash or FDs so that you can take care of your expenses if there is a loss of income. This will help you remain rational and avoid panic selling to meet expenses.
- It is going to emotionally tough and gut wrenching to remain invested. Your mind and emotions will scream at you to get out. It will be a torture to put money into the market and lose 20-30% in a matter of weeks
- We maintain a list of 200+ companies which we track from time to time. The buy candidates will be from this list. We are in no hurry to rush in.
- It is a given that we will get the timing wrong. we will either buy too early or too late. I hope you have already realized that and are fine with it
On the question on how to execute, we laid out the following points which remain true today
- Please review your asset allocation (yourself or with your financial advisor) and plan how much you are willing to allocate to equities. This allocation is based on individual situation and there is no fixed percentage. That said, one should not exceed this allocation.
- Once you know the amount you can allocate, one of the options is to invest it as per the model portfolio. If that is the case, the amount per position is based on the position size in the model portfolio (multiply position size % with the amount you want to invest)
- If the current price is below the buy price , you can add that position to your portfolio.
- I would suggest going for a staggered approach. Start with 25% of the final size and keep adding to it over the next few weeks/months (as long as it is below the buy price). You won’t get the absolute bottom for each position, but should get a decent average price
There is no assurance that things will work out equally well, but history shows that equities offer the best long term returns when there is a lot of uncertainty.
