“You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets” - Peter Lynch
Investing in stocks can help you make a lot of money. This is the ideology that attracts most investors to the stock market. There are multiple success stories of individuals who started with nothing and have built an empire just by investing in stocks. But for every success story, there is also the investor who quit at the wrong time.
Getting inspired is alright and taking the first step towards investing in stocks to grow your money is necessary. However, the problem arises when investors enter the stock market with unrealistic expectations. If an investor does not understand the market dynamics and does not account for risk, getting in at a unfavourable time can cause immense disappointment.
Investing is not all fun and games
Look at the journey of the sensex, there are 18 instances of more than 10% correction in the 16 year history.
There is a expectation mismatch
Short term and even longer corrections are normal in investing and when the broad market is underperforming, expecting high returns is unreasonable. There’s no future for a investor who denies the existence of risk. To be a successful long term investor, be aware of the risks and the rewards that come with risk.
What are the types of Risks in Investing?
While, investment risk is the exposure of an investment opportunity where loss of capital or downturn might be factored in. Investment risk is still a broad term but can be understood when broken down into the parts, i.e Systematic & Unsystematic Risk.
Systematic Risk
Inherent risks in the stock market are known as systematic risks. These risks affect the whole market. Because they affect the entire asset class, they're also known as "non-diversifiable risk" or "market risks."
External factors such as the present geo-political situation, monetary policy changes, and natural disasters are common causes of these risks. COVID-19, for example, is a systematic risk since it has an impact on the entire stock market & these risks are non-diversifiable as a company can not control, avoid or minimise these risks.
Unsystematic Risks
Unsystematic risks are specific & diversifiable risks that are peculiar to a particular company or industry. These dangers develop as a result of a variety of internal and external causes that influence only the specific business and not the entire market. Systematic risks have components such as Business Risk & Financial Risk.
How do we handle Risk?
We use quite a few tools to handle risk:
Regime Modeling based Dynamic Adaptiveness
Asset Allocation or Diversification
Deallocation in extreme events
The core of our ethos contains a regime model that uses Artificial Intelligence to forecast the next month in the market. Is it bullish or bearing?
We change our asset allocation to make sense of the volatility and switch to safer havens of bonds and gold ETFs.
We also have a deallocation policy that helps us switch to cash when the markets are precarious. This improves long term performance.
What you can do now to make the most of the market is SIP! Rupee cost averaging or buying regularly at all levels can give you a much better entry point.
Scenario Analysis and Expectations
Let’s analyze our top portfolios and see how they work in different scenarios.
The Momentum stocks are high risk stocks. They crash when markets are crashing. But with our strong risk management we deallocate and adjust dynamically to minimize losses.
The expectations from these portfolios are based on purely data driven numbers, which makes us confident about the long term performance.
The Multi Factor Portfolios Are more conservative and see lower drawdowns. With our strong risk management we deallocate to bonds, gold and adjust sectors dynamically to minimize losses.
The expectations from these portfolios are based on purely data driven numbers, which makes us confident about the long term performance.
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