"Keep Calm During the Pandemic, Do Not Redeem Your Investment Under Pressure": Raju Rayamajhi, Assistant Director, Nepal Rastra Bank

The stock market is the mirror of an economy. All the activities of the economy directly affect the stock market. Investors are in confusion when there is a chaotic situation in the market, especially seen during the ongoing pandemic.

There is high volatility in the Nepalese stock market due to this situation. Investors have three options – invest, hold and redeem in this situation. As an investor, one should keep in mind that no situation lasts forever. We have been through the great depression. And the memories of the swine flu and Zika virus outbreak are still fresh.

It is important to keep calm and not redeem your investment under pressure. There is a saying of great investor Warren Buffet “If you cannot control your emotions, you cannot control your money.”

As investors are worried about their investment there are few tips that equity investors need to know.

Should you invest?

This is not the first time we have faced this situation. Recently we have come from the first wave of Covid-19. Our economy has faced earthquakes and political turmoil. Even after these situations, the stock market has emerged stronger. This is a very good time to increase your investment as the cost of purchase is low. So your overall WACC comes down if you invest in a stock market correction.

Redeem, if you can book profit?

Redemption is to be done only in two cases. If you have earned good profit out of your investment or if you need money urgently. There is a popular misconception regarding redemption in a market crash. But the market crash is the best time to invest for the long-run investors. So never redeem the investment in a market crash rather add the stocks in your portfolio and decrease the overall costs of investment. It is important to remain calm if the situation is unfavorable.

Portfolio Diversification?

Harry M. Markowitz originally proposed modern portfolio theory in 1952. According to him “ if the correlation between two securities is perfectly positive, there will be no benefits of making portfolio formulation of such securities”. It is because it is just like putting the eggs in two baskets tied together- the fall of one basket is accompanied by the fall of another. Hence, as time goes by some stock will over-perform or underperform as per market condition, like the current Covid situation. Therefore your portfolio needs good diversification including all sectors. Hence, you need to revisit your portfolio from time to time to match the market goal.

Invest more?

It is always a good decision to invest more during a market crunch. It will help reduce the overall cost of the portfolio and will provide benefits when the market resumes stability. Some of the safe investment options are :

i) Blue-chip stocks
ii) Mutual fund
iii) Debt funds

Conclusion

The coronavirus has hit the global economy hard but we will get through this. Do not panic and redeem your investment in this situation just because of fear of the pandemic. Investors shall look at equities and allocate capital that is not immediately required for at least another 1 year.

Article by Raju Rayamajhi, Assistant Director, Nepal Rastra Bank

Disclaimer: This is an opinion piece. The author takes full credit (and responsibility) for the views presented. Reader discretion advised.