Stock markets are booming again with bellwether indices recording lifetime high today in less than nine months of hitting the 5-year bottom. This comes at a time when the world is going through pandemic, and things back home are more fragile not just in terms of health emergency but also on economic front and national security. Amidst all this, what seems to be driving the markets up is FOMO.
I would have almost missed this iconic moment in the history of financial markets when Sensex and Nifty hit new highs had it not been for the media – print, electronic and social. This definitely is remarkable in the context of the timing where there is gloom everywhere. The behavoural practitioners have aptly identified fear and greed as the two strongest emotions that lie at the heart of financial markets. And rightly so, as it takes two opposing views to converge a deal but when one overpowers all others we have the polarised situations that we witnessed in March 2020 and now.
The fear of unknown, perperated by overnight lockdown announcements across the world led to sharp decline across markets with people scrambling to create liquidity buffers. As the governments stepped in to salvage the situation with multi-billion deals, it built the trust that the world is together in this and resulted in additional source of liquidity. This liquidity found its way back into the markets at a much faster pace as another form of fear took hold – Fear Of Missing Out (FOMO). The investors followed in footsteps of each other thus creating a chain that kept pushing the graph higher.
The growth seen in three years since 2017 till Feb 2020, has now been replicated in less than eight months as people realised that the gloom and doom of March was not warranted and enthusiastically jumped right back in. This journey of last few months for common investors yet again suggests that volatility in markets needs to be embraced but not necessarily acted upon.
The best way to navigate turbulent waters is diversification across different assets / instruments so that the kneejerk reactions in equity markets are avoided as such actions erode the benefits of compounding which get built over a period of time. A small illustration below suggests this:
Anyone who partly cashed out during crash due to fear of erosion or loss but started to deploy this again from April onwards through SIP has ended up where they were in February despite the indexes making new strides. It seemed that living under the rock worked better : ) Essentially, the long-term wealth creation should be based on discpline and consistency rather than fear, supported by diversification to other liquid assets so that the process of compounding is not interrupted.
Happy Festive Season!
Disclaimer : I am not a SEBI-registered investment advisor. The views expressed above are personal and based on own experience.