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Known Fact: Equity markets go through a cycle.
The cycle of peak and trough. The cycle of greed and fear.
Cycles have happened multiple times in the past and will continue to happen multiple times in the future.
Every time underlying reasons for a peak and trough are different but one thing always remains constant – human behavior.
Every peak is accompanied by an aggregation of collective greed and every trough is strongly correlated with an aggregation of collective fear.
At the extreme end of greed, the equity valuations are the most expensive with high downside risk and the lowest upside returns potential.
During extreme fear, equity valuations are the cheapest with very limited downside risk and the highest upside returns potential.
Many of us know this. Many smart people in the world know this. Why then very few are able to take advantage of this naturally occurring phenomenon of mean reversion?
I can think of the following reasons:
- Lack of patience: Since market cycles can be long, one needs to have immense patience to see it through
- Weak conviction in one’s own understanding of valuations: Understanding valuation and having the conviction to stick to it, is not everyone’s cup of tea
- Inability to maintain equanimity during market volatility: Having a calm temperament when everyone is going crazy helps make logical decisions which is mostly going against the crowd
The above three are easier said than done. That’s why the great investor Warren Buffet once quipped – Investing is easy but not simple.
However, we can make it simpler by having an asset allocation framework that helps maintain discipline in taking logical steps when our emotions are revolting.
Despite knowing the importance of discipline and the logic of buying low and selling high, we tend to not follow it when the time really comes. That’s why a pre-defined investment roadmap is important.
We at Truemind Capital prepare an asset allocation plan and investment roadmap for all uncertain market scenarios. This simple yet powerful tool has been able to create wealth in a consistent manner by protecting the portfolio from major downturns.
Do you have an investment roadmap/framework to guide you through market volatility? If not, it’s high time you start preparing one today to not just safeguard your investments but to enhance your long-term returns and ensure a peaceful financial future.
Originally posted on LinkedIn: www.linkedin.com/sumitduseja
Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.
