Japan and your investments

The world's third largest economy has been bruised, but there's little reason for Indian investors to panic.

In our previous issue, we had written about the need for geographical diversification of your investments to mitigate country-specific risks. The past week has shown how terribly correct our assessment was. The 11 March earthquake has shaken the Japanese economy, pulverised the stock markets and sent shockwaves across the world. The Japanese stocks suffered their biggest two-day loss in almost 25 years, when the Nikkei slipped 6.2% on 14 March, followed by a 10.6% tumble on 15 March.
    The natural calamity in Japan has put retail investors in India on the tenterhooks. While the Indian markets have not been hit too badly, this could change if the nuclear situation worsens in Japan. However, before you make a hasty decision regarding your stock holdings, here are a few points to consider. Not the time to panic: The world's third largest economy has been badly bruised, but eventually, it will recover. The restoration could take some time given the magnitude of the devastation. In fact, the rebuilding of Japan could lead to a higher demand for Indian products. Economists say that natural disasters are negative for growth in the short term, but tend to be positive over the medium term. So, dumping your stocks now may not be a good move, especially since most of the bad news has been factored in. Don't catch falling knives: When we say this is not the time to offload stocks, we don't mean it's time to add more. A sudden drop in the price of the share you have been tracking may appear tempting, but you may be trying to catch a falling knife. Don't keep adding more of a losing stock just because it reduces your average buying price. Wait for things to settle down before making fresh commitments. Diversify your portfolio: An important lesson from the disaster is that diversification really works. Not just across stocks and sectors but also across geographies. The Japan effect has been felt worldwide, yet some markets have not fared as badly as those directly dependent on the Japanese economy. So, don't put all your eggs in one basket. One way to do this is to buy a diversified equity fund which also invests in global assets. Maintain a cash buffer: This is not directly related to stocks but could have a bearing on the returns from your investments. Keep enough cash reserves to help you tide over an emergency. If you don't have enough cash, you might be forced to liquidate other assets. Selling stocks to raise cash when the markets are reeling under the impact of a natural disaster can be a nightmare.

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