Neither falling nor rising markets should be chased
On December 1, the Bombay Stock Exchange equity index Sensex reached a peak of 63583 points and closed at 63284 points, which is an all-time high. The NSE NIFTY index also peaked correspondingly.
Experts attribute many reasons for the current uptrend of Indian equity market. Broadly, it may be because of heavy investments on the part of the foreign portfolio investors, which in turn is due to positive outlook of the Indian economy in comparison to other emerging markets.
The Indian economy is perceived as a better managed one with best productivity in terms of GDP growth and also with better managed inflation compared to other countries.
Bull and bear markets are nothing unusual. From our experience we have also seen that the bull market or bear market will also have its own peak and reverse from there. Wrong entry or exit will ruin the investors’ wealth. There are standard tools to manage one’s investments during such phases.
Asset allocation is an investment strategy by which an investor attempts to balance risk versus reward by adjusting the percentage of amount invested in an asset of a portfolio according to the risk tolerance of the investor, his/her goals and the investment time frame.
When the equity market is rising, your equity investment balance will go up. To maintain the original asset allocation plan (as percentage), there should be diversion of funds from equity investment to fixed income securities. But investors generally get impressed by the equity portfolio performance and start pumping more funds towards equity when the market is rising.
This will be a risky proposition as the original purpose of asset allocation based on risk parameters will be defeated.
Any person may be holding some dud stocks. It is time to get rid of such stocks when you perceive the price is far above its intrinsic value.
On seeing the market galloping and some friends are making money, some people who have never invested in stocks are tempted to invest afresh. Mostly they do this based on tips from share brokers and friends. This is a very dangerous way to invest. Peter Lynch will say that investing in a falling stock is like catching a falling knife. In the same way, trying to catch the rising market is like catching a moving train. Slow and steady investment will only win in the long run.
When we analyse the Sensex for the last 25 years, we can notice that out of 25 years, barring six years, all the years a new peak was reached. In all these years, the previous year’s peak was not fully maintained in the subsequent year and there were always lows (less than the previous year’s high). For example in 2021-22, the high was 62245 but in the current year the low was 50921.
Out of 25 years, in three years the low was less than the previous year’s low. In the long term, the market will go up. A year’s peak may not sustain throughout next year. Ups and downs are part of the market and new highs and new lows are nothing unusual. One need not enter an overheated market in a hurry. One need not get out when the market falls. Investment time in the market is more important than timing the market. Regular and periodical investment based on one’s risk appetite is important and discipline in maintaining the asset allocation will be crucial to reduce risk for optimum return.
(The author is a retired banker)