India just scrapped 80% of its currency in circulation by declaring the existing Rs 500 and Rs 1000 as no longer valid or 'legal tender' for transactions. While there is a lot written about what you are supposed to do with your existing big denomination notes, there is much less on how it will impact your investments.
Let me just put it out there bluntly without any howevers and on-the-other-hands: It is a hugely positive move structurally that will strengthen our economy in the long run. Almost all industry stalwarts have welcomed it, calling it a 'watershed' moment.
But what about the stock markets?
How the stock market is going to react to it today and in the coming weeks or months is another question altogether. As I write this, the SGX Nifty (Nifty futures being traded on Singapore Stock Exchange) is already down more than 2% - so clearly the stock market is not loving it.
For obvious reasons, real estate sector would be the worst hit and so will be a lot of banks because they have given a ton of loans to these real estate companies which might soon turn to NPAs. These two sectors are big enough to drag down the overall sentiments and stock markets. The bad news is immediate while the benefits for the economy lie in the future - a typical case where we should not go by the stock market's short-term reaction to judge the decision.
When will we see the benefits of the decision in the stock markets?
I don't know. I don't know how deep or long the correction will be. May be it will all be over today itself or may be this will mark the beginning of a big slide that will take months if not years to recover from. While we are recovering from this may be something else will happen that will throw the whole global economy in a funk. I don't know. Just like yesterday I didn't know something like this would happen. And nor does anyone else. Our markets were positive yesterday remember.
So what should you do about it? Should you be selling or should you be buying?
I dont know if you should be buying or selling but you definitely should be turning off the stock market news channel.
You did not think the stock markets would never fall when you started investing, right? No matter how historic this particular decision may be, such big moves (and ensuing trends) are business as usual for the stock markets and investing. Often they move up and down by a little every day and sometimes by a lot. The sooner this becomes business as usual for you too, the better investor you will be. Today it's the RBI scrapping some currency notes, tomorrow it would be the US Presidential elections and day after it would be something else with similar far reaching consequences for India and the world.
If you are investing in the stock markets for your long term goals like retirement which is 20 years down the line, or for your child's education which is after 10 years, selling now to get back in after even say a 10 or 20% drop wouldn't really make much of a difference (assuming you can successfully do so - which in itself is incredibly difficult to pull off). It is more likely that you will end up derailing your entire financial planning in trying to time the market.
If you were investing in stock markets for a quick gain because the markets seem to be going up - well, now you know better. This is the risk part of the risk-reward equation.
Your biggest take-away from all of this should be that the world and hence the stock markets are extremely unpredictable. You don't know what is going to happen and no amount of analysis will help you predict the future. The best way to deal with this uncertainty is by investing according to your risk profile (and your goals). I cannot over-emphasize this. Investing is all about managing risk and not dreaming about returns. Invest like the market might crash tomorrow and you still wouldn't panic. Don't invest in equity if you cant take such losses and still hold on to your plan.
This is why at Goalwise, we put a strong emphasis on risk profile and we deliberately use an equity-debt allocation based on not just your chosen risk profile but also the time horizon of your goals so that such unexpected events don't derail your plans.
This is not the first time the markets have behaved like this and this won't be the last. Be prepared. Manage risk well. Invest in goals not markets. The rest will follow.