Fasten Your Seat Belt…Air Pocket Ahead

“Europe’s debt crisis is threatening to push large parts of the world into recession,” read a headline in The Telegraph.

The Greeks, the Italians, the French…the Europeans are seemingly all set to bring the entire world economy down to its knees, as if to prove a point to the Americans that they aren’t the only ones to be controlling the ‘recession’ lever.

Anyways, if the woes in Europe and the US aren’t enough, weakening economic growth and corporate profits in India are also playing spoilsport for the stock markets.

Note: Country names represent their respective stock market indices; Source: Yahoo Finance
One company here is asking the government to bail it out because it can’t pay off its debts that it had taken to fund an aggressive growth in the past.

Then there is another – a leading bank – that is facing serious issues because a large number of its borrowers are not paying it back.

Some are stuck in scams that were the creation of their Chairmen’s willingness to break the rules and earn fast money.

Then there are others that are seeing declining production because customers don’t have the money to buy their products or services.

Overall, the world (and the Indian) economy continues to pay for the excesses of the past few years.

But despite that, the ‘smart’ anchors and ‘over-smart’ analysts appearing on the business channel were all saying, “It’s the time to buy stocks, because all concerns – US, Europe, inflation, interest rates – will evaporate in a few months.”

I don’t know if they have some crystal ball to forecast the stock markets’ near future. At least, I don’t have one.

The future can surprise me, so I don’t like seeing it when I have so many things to do now to make my present better.

What choices do you – the investor – have?
If I know you even a bit, you seem to be a typical investor who is saving a part of his hard-earned money to provide for his’ and his family’s future needs.

I’m also assuming you’ve got 10-20 years to build up a good pile of savings into a fund that can help you meet your future financial needs.

So, while you are looking at the future, you are working towards it in the present. That’s good!

That’s why I don’t want you to recoil in the fear that the world economy is going to go dead in some time…and that all your stock market investments will be permanently lost.

Of course, I’m also not predicting that the global turmoil will calm down in the near term. In fact, I can see things only getting worse over the next few months.

So what I want you to do to protect your savings and investments as you face-off this turmoil is this…

1. Create an emergency fund that must be of a minimum size of 12 months of your monthly expenses.
2. Cut your discretionary (non-compulsory) expenses so that you are able to save more.
3. If you plan to invest for a 2-3 year time frame, don’t put more than 15-20% of your money in stocks or equity mutual funds.
4. If you have a 10-20 year time frame, start investing 60-70% of your money into stocks or equity mutual funds.
5. Don’t invest all your savings at one go. Break them into pieces and invest bit by bit, month by month.
6. Don’t believe advisors or experts who promise you that things are going to get perfectly fine over the next 1-2 years and that you must rush into the markets and invest a lot of money. Instead, do your homework to find out the best stocks and mutual funds.

In all, if you are a long-term investor, hard work and taking chances are going to help you create the required wealth.

Of course, sometimes you’ll beat the market and sometimes the market will beat you.

But provided you don’t make any major mistakes, you can earn a good inflation-adjusted return from good-quality stocks and mutual funds over the next 10-20 years.

Remember, the current turmoil is only an air pocket (that can of course be deep).

But if you can tighten your seat belt (by doing what I suggested in points 1 to 6 above), you will survive the air pocket and reach your financial destination safely.