The general public venting their angst, calls for a nation wide bandh and demands for a roll back – all of this is a result of the recent hike in petrol prices. A stitch in time saves nine – what should have been gradual increases over a period o
f time was brought in at one go. Obviously it was too much for the aam aadmi to digest.. Of course the government knows this – but the imperatives of politics ( state elections) prevented them from doing over the past five months what was always the correct thing to do.
Petrol is actually a small part of the story. The real problem lies in subsidization of diesel, kerosene and LPG. We consume these fuels, we ought to pay market price. And just like in the case of other items like say vegetables, if the as the price rises, consumption decreases – thereby bringing in a semblance of balance to the demand- supply equation.
But since the government, in its wisdom, has for ever been following a policy of subsidizing fuel, the population at large really has no idea of the real price of these commodities. And when sporadic attempts are made to readjust the equation, we protest as if its a threat to our existence.
In the larger picture, the rupee is into a free fall.
Without going into the actual numbers ( trust us, they are sufficiently large and extremely worrisome), our trade and fiscal deficits are slowly reaching unmanageable proportions. The era of coalition politics has resulted in a policy paralysis – whichever undertaken reforms are stalled by some political party or other, no matter that the country at large will benefit. And as Vodafone was to learn at its own peril, tax rules and regulations, which are an important consideration for foreign investors committing funds and resources for long term projects are chopped and changed as per convenience.
So all in all, not a pretty picture at all. But more importantly, not the end of the world either. And in all that the column has mentioned so far, the last sentence – it is not as if its the end of the world – is most important from an investors point of view.
Yes, things are bad now – however, we human beings whether as a government or private enterprise or the public – have a way of learning from our mistakes and pulling up our socks – and this syndrome – of making mistakes, suffering the effects of the same and then correcting the wrongs is also called a market cycle.
These market cycles will keep repeating themselves as long as mankind exists.
In the meanwhile, how should we, as investors tackle this situation? The simplest and the most effective solution would be to have a carefully thought out asset allocation policy in place. Now, a tailor made, suitable asset allocation strategy would indicate that rather than going overboard on fixed deposits and FMPs, during current times, you should actually be adding a little to your equity portfolio.
Basically sticking to your allocation pattern would discipline you to buy low. And then eventually when the market picks up and the aggressively promoted equity funds make a comeback, it is your asset allocation that would prevent you from succumbing to the seduction. Sticking to the allocation pattern would have you actually reducing the equity component in your portfolio. In effect, you would have booked profits and sold high. And as everyone knows but seldom practices, buying low and selling high is the only way to make money in the stock market.
Therefore, while investing is important, asset allocation is critical. In other words the actual selection of specific stocks, bonds or deposits is actually secondary to the decision of how much to allocate between the high and low- risk investments.
The reason for this is that since each asset class has different levels of return and risk and therefore will behave and react differently to a given market situation.
So if equities rise, interest rates and gold prices would in all probability be subdued – if equities fall, safer assets like bonds and gold would