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The notorious steering wheel!

The notorious steering wheel!

Recently played a car racing game on my phone, where I did very poorly and most of the time the car went off track. The steering was over responsive, and the car veered from one end to the other.  To keep pace and to get on to the track I fiercely turned the steering in the other direction only to be thrown off track but this time, on the other side!  This kept happening with me and staying the course was very difficult.  Sometimes I was too fast and in some places, too slow.

Markets and economies are similar.  Policy makers have a view of the current situation and keep maneuvering the steering.  However, there is a lag between their action and economic performance.  The big difference here is that the steering is far less responsive and the track (read as road) is less clear.  Policy shifts happen in anticipation and they turn the steering in one direction and may end up throwing the car (economy) off track, or may apply brakes in anticipation (hiking rates) and may end up slowing down the economy.  There is a lag between action taken and consequence of that action.  Over reaction may derail and under reaction may lead to policy action falling behind the curve. Markets derive direction from macros and policy actions have a bearing on market performance. 

It is the same with investors.  There is a constant need to balance present with future, returns with risks.  Sometimes one may be early and at times one may be just wrong and the difference between the two is known only in hindsight. Stubbornness masquerades as conviction, delusion as vision, recklessness as boldness.  Quick returns and big returns are all very close choices and the lines keep blurring.  Investors have to make tough choices of having to steer an over responsive car (portfolio movement) in an unknown track (market direction). The chief problem for an investor is that bull markets may make the portfolio look so good that one may have delusions about their investment management abilities and bear markets may rattle so much that it can make an average investor move everything to cash. 

So how does one stay centred?

The important thing in investing is Balance.  Noted economist Harry Markowitz said “I visualized my grief if the market went way up and I wasn’t in it – or if it went way down and I was completely in it.  So I split my contributions 50/50 between stocks and bonds”.  This provides the foundation for asset allocation and the need to invest across asset classes.  In investing it is important to stay on track and direction is more important than speed (rate of return). Asset allocation helps stay the course.  Spreading investments across debt and equity helps as brake and accelerator and helps the investor stay on track.  Investing is like a marathon where the attempt is not to finish first but to first finish.  Survival is key and hence speed matters less. 

Striking the right balance between these opposing forces is key.  Providing room for error in our own abilities, that despite doing all the right things there will still be uncertainty.  Like a pilot had described his job as hours of boredom punctuated by moments of terror, investing comes a close second.

So, stay well prepared and a little paranoid in the right balance.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management Private Limited will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.

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