I do not have enough time nowadays to keep actively posting here seeing recent global asset class clash, i believe that i can offer some advice or help to those who are involved and to those also who are not involved, thus posting this.
Second point pertinent here is why i am posting this in P&M forum. There is a valid reason for that, at least in my opinion, though mods are free to overrule.
The first thing about stocks and all other asset classes is to understand is that their rates never ever reflect guanine levels. By guanine, i actually means at what levels they should be because of purely fundamental reasons. The rates are more driven by the short term psychology of market participants. Thus, if one wants to make money there, he/she should able to understand human psychology better that the fundamentals of asset classes. And, that is precisely the reason why i put this thread here.
Having said that, it does not mean that the rates ignores fundamental reasons. They also always follow fundamentals, but the actual problem is that they never stops where fundamental reasons suggest. Rates always shoots beyond that on both sides. They either go excessively high or low, depending on the psychology of market participants at any given time.
Another thing to always remember, which is perhaps the most important one especially for those who are actively/regularly
involved with markets, is that all these are artificially manipulated markets. The rates of all major asset classes all over the world are manipulated by a handful the large participants, who do not account more than the 5% of total number. They always manipulate and control the rates in their favor. And, that simply means that it is only those 5% who earns in the end, rest 95% are always bound to lose. What i am saying does not seem to be true but unfortunately it is always. Though, there may be some exceptions.
Just like all other events like elections, where crowd psychology has far more compelling effect than actual benefits or harms, the rates of all asset classes are determined by the greed or fear of market participants. In other words, we can say that there is a continuous election goes on in the markets and the rates are the results of those elections. If the greed is dominant, the results/rates will move higher. The the same way, if the fear is more in the crowd than greed, the rates will go down. This movement happens in the short term to both sides irrespective of fundamentals, though the medium and especially in long term, rates will always moves towards fundamentals levels. But again, the rates will never stops at fundamentals. The short term greed and fear present in the crowd mentality at that future time will again overrule the fundamentals. And, this process goes on and on. That is precisely why rates never remains at where fundamentals ask.
Now comes the million dollar question, what is the way out! Should one always keep away from markets! And, if not, how to deal with this situation! The answer is different for different people.
Those, who do not want to take risk at all or easily gets intimated by the ups and downs of the rates, should not involve at all, irrespective of whether the markets are going up or down. Just stay away.
Those, who want to build wealth in the long term but also ready to take some risk, there is no better option than this route. Actually, there is no risk in real terms. Yes, there can be some illusion of loss in short term but if one is ready to invest systematically in the long run, there will never be loss. But, some planning is certainly required for that.
The best route for these people to go through SIP route. SIP stands for systematic investment plan. SIP means that one puts a certain amount of money monthly in a mutual fund over a long period of time, irrespective of market is down or up. This regular investment method automatically averages out all ups and downs in the long run and the investor gets good returns. The rate of returns may vary for different geographies. As a thumb rule, the rate of return should be around three times of bank deposit rates, especially in developed countries like US. In developing markets, the return may be less, say double of bank deposit rates.
Most people do not understand or believe this but this SIP can create a huge wealth in the long run, far more than one can imagine, and without any hardships too. The only caveat here is that one should invest only surplus money, and one should be able to invest that same amount monthly regularly for years.
Now comes the third category of people, who are ready to take more risk and trade actively in the markets. Philosophically speaking, they should follow a very simple premise, by fear and sell greed. Means, one should buy when the markets are feared thus down and sell when markets are greedy thus up. But, the problem in this is that nobody knows how much greed or fear in the market and to which extant level they will go either way and when the tide will turn. Yes, there are some technical indicators like VIX and put/call ratio to assume that but one can never be sure.
But, history of markets and my personal experience also tell me that all these corrections turn out a decent time to buy over a period of time. People have very short memory. Remember Brexit day or when Trump got elected. Markets all over the world witnessed the same bloodbath and look where are they now. The same will happen this time too. Secondly, there is no such fundamental or major reason this time.
Experts are saying that the markets are falling because the the wages in US are rising, which will ultimately lead to inflation and force Fed to raise interest rates before schedule. Both o this will impact the US growth and it is almost peaking thus the markets will not move higher from present levels. This is causing unwinding of all speculative future long positions across all asset classes thus this selloff. But, as i see it, it seems to be more like an excuse than a reason. Markets are overheated and ran too much ahead of time, especially in last two months. They were looking or excuse or correct. The world economy is expected to grow around 3% next year, thus the markets will also move upwards in the long run.
In my opinion, this is a time to start investing, if anybody is interested. Do not fear the fear but try to buy it.
The easiest and safest way to start SIP immediately, as immediate as today. You are getting things at 10% less price. If one wants to invest onetime, invest 25% of your surplus money. Please remember the word surplus. Do not ever invest that money which you may require after some months. There is a chance that market may see further 5-10% correction, and if not, time correction will come for sure. Time correction means that time will correct, not rates. In other words, the rates will remain same but earning will improve over a period of time and thus rates will once again become cheap relative to present levels. After investing 25% o your surplus money now, one can keep investing 20% more at every 5% fall. Market will not go beyond that. Even if goes, it will recover. And, even if not recover immediately, it slowly will. It may take time but ultimately one will end up handsome gains. That risk with the markets will be always there. If one does not want to take that risk, SIP route is there.
But, remember these opportunities do not come often for common people.
with love,
sanjay