Strategies for long term investment as markets correct

Investors remain concerned over the pace of the global economic recovery and have turned cautious in their approach to the markets, leading to profit-booking at every rise.

Although the results season was largely positive with most companies reporting earnings in line with or exceeding market expectations, it was weak global sentiment and consistent sell-offs by foreign institutional investor (FII) in last few trading sessions acted as a catalyst for the market correction.

The current rally in the domestic markets was driven mainly by liquidity owing to heavy inflows from FIIs who found the Asian markets poised for a recovery much ahead of their Western peers. While the domestic economy did not disappoint in terms of earnings numbers in the last two quarters, the current prices had already factored in the growth, thereby not leaving much room for a further upside. The market will now look for global cues to decide on the future direction.

The Reserve Bank of India (RBI) in the monetory policy, scheduled to be announced today (29/01/2010) afternoon, is expected to hike the CRR and Reverse Repo rates.

Over the short term, the markets could display increased volatility and this in turn could throw up attractive opportunities for medium to long term investors. While the long term growth story of the domestic economy remains intact, the short term will always be marred with uncertainty. Long-term investors would do well to use this uncertainty to their advantage.

Here are some strategies investors can adopt to ensure their portfolios remain aligned towards growth:

1. Review asset allocation

Investors should stick to their asset allocation across equity, debt and money market instruments depending on their overall investment profile. Reviewing the asset allocation when the markets peak gives an indication of whether to book profits in equity. As the markets correct, an asset allocation review will help investors decide on the amount which should be shifted back to equity in order to balance the asset allocation.

2. Maintain liquidity

Falling markets often present attractive opportunities but it can be made use of only if investors have money to invest. Re-balancing asset allocation can provide some liquidity to the investor and this can be used effectively to pick up desired stocks when the markets correct.

3. Selection of stocks

Stocks, especially in the large-cap category, had a major run-up in the past few months. For investors, it was a risky proposition to enter these stocks at the levels at which they looked more than fairly-valued. A correction in the markets has brought these stocks back to prices which are attractive for medium to long term investors. Hence, investors can identify their target companies and slowly start accumulating these stocks as the markets offer opportunities.

4. Stagger purchases

While the markets have been in a correction mode for the past two weeks, it is difficult to predict whether this phase is temporary or will continue for a while. Hence, it is important to stagger the purchases over a period of time rather than buying in one go. The expected volatility in the markets may give investors many opportunities to pick stocks at desired prices.