How to invest in volatile and falling markets?

Sum analyzes investment strategies across asset classes for investing in volatile and falling markets. 

Part 1 - Cash Holdings

Disclaimer: Views in this blog are personal and do not recommend an investment strategy. Please exercise due diligence before taking any investment decision.

We love gains and we fret losses. In fact we hate to look at losses or recognize them. We stop opening envelopes or emails containing our monthly portfolio statements and we flip the pages of newspapers printing the NAV of our SIPs and MFs, especially when our portfolio is underwater. Analysts call it the ‘unopened envelope’ syndrome; a situation which is typical with the investor psychology of loss aversion.

Markets world over are in a tailspin so I expect a lot of unopened emails and envelopes with portfolio statements in them. Ironically the ‘unopened syndrome’ happens at a time when the portfolio has lost some weight and it becomes even more important to analyze it and make some tactical adjustments. I present a general overview of investing principles with respect to different asset classes in a falling and highly volatile market.

Cash (including cash instruments)

Cash in this context includes your savings and checking accounts along with instruments which can be readily converted to cash without a loss in value. Ideally an investor should hold cash equivalent to his 6-12 months income for unforeseen expenses and contingencies. Holding cash is a personal decision depending upon the particular circumstances and near term foreseen expenses. Cash as a reserve is also dependent on the status of insurance cover of the investor. An investor holding adequate life, health, disability insurance along with insurance cover for assets like house, vehicle etc would require less cash reserve relative to an investor who is under insured both with respect to his life and physical assets. (Insurance requirements are discussed as a separate bullet point).

In a recessionary and volatile environment cash suddenly becomes a valuable asset. Falling markets provides good pockets of opportunities across asset classes which can only be exploited if the investor is holding excess cash. But it is equally unwise to hold cash in anticipation of falling markets; the caveat being that if you are expecting positive cash flow (besides your regular income) you should not rush to invest it. Rather you should take some time to identify undervalued assets and invest in them. 

Bottom line: Holding cash in falling and volatile markets is not a sin. Exploit value by investing in undervalued assets.