Wednesday, 9 September 2015

Why are the markets falling?

The market crash of the last few days has been very steep and the reactions from people also have been quite caustic. The Sensex song has resurfaced after a long gap. Some people have highlighted that the crash is “made in China” and hence it can’t last long.

What is the purpose of this analysis? What are we trying to achieve by identifying the reasons behind the crash? I guess the idea is to be ready when the next time these situations arise.

What is the reality? Here is an excerpt from my book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget“:

As long as the open markets survive, wherein people can come and trade on the basis of their opinions, we will see the prices fluctuating, with amazing regularity. We have a tendency to expect explanations for everything – even if the explanation is incorrect. Experts (while there are genuine experts, in some other cases, the expertise may be questionable) are in abundance to fulfil this need of the masses. However, if you look at the explanations given, they often cannot pass scientific tests.
When the result is the same and the reasons keep changing, you know that the reasons do not matter. They have lost relevance.

That is exactly the case with explanations of market volatility. The reasons attributed to short-term market fluctuations keep varying, but the volatility is here to stay. The right thing to do is to accept volatility and stop finding the reasons behind it.
Remember the old saying, “You can’t direct the winds, but you can adjust the sails.” Translated in the context of this book, this should read as, “You can’t prevent market crashes, but you can safeguard your portfolio.”
The message is loud and clear. Stop thinking of the reasons behind price fluctuations. You portfolio needs to be such that the impact of market crashes do not steal your good night’s sleep.

So what should you do now? Nothing. Do not let the market fluctuations upset your financial plan, provided you have one. If you don’t, get one.
       - Amit Trivedi, author of “Riding the Roller Coaster – Lessons from financial market cycles we                               repeatedly forget”

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