Equity investment: View from peak

To start with,its a good idea to articulate what lessons one can learn or ought to have learned from the Sensex’s wild ride from 8,000 points to 20,000 points in the last couple of years.

Fear and greed

The market is driven by contrasting emotions of fear and greed. Warren Buffett,the world’s best-known investor and the third-richest person in the world,has said that investors should be greedy when others are fearful,and fearful when others are being greedy. The right time to buy would have been when the market was dropping like a stone,ultimately settling at a low of around 8,000. But there aren’t too many who can honestly say they bought at this level and held on till now when we have hit 20,000.

In a high-growth economy like India’s,the stock market will always recover,as we are witnessing right now. Nevertheless,one must beware that one is now not falling into the trap of being too greedy by jumping in now,after having been at the sidelines from the dramatic rise from 8,000 to 20,000 points.

You can’t time the market

Even the world’s best investors can’t tell whether the market has hit the bottom or is close to a top. Therefore,the best strategy is to invest periodically in a disciplined manner,whether the market is up or down. If you followed this discipline on the way down from 20,000 to 8,000,you average price of entry would have been very low. And,if you followed the same discipline when the market rose from 8,000 to 20,000,your average price would be lower than the current market price. Both ways,you would have won.

Keep some funds available to invest

The best investors in the world always keep some ammunition ready so that they pounce on investment opportunities when they appear. However,a lot of retail investors forget this. You can only invest if you have spare funds which are easily accessible. Many investors have missed this rally because they did not have ready access to funds,because most of their money was tied up in liquid investments,or they did not have surplus funds.

What should you be doing right now?

Whether you already own stocks or mutual funds,or are looking to invest in them today,the following are applicable to both types of investments.

(1) Review your asset allocation: Asset allocation is just a fancy way of talking about the proportion of your money invested in stocks,bonds,fixed deposits,gold and other asset classes. Depending upon your age and risk profile,there is a correct asset allocation that you must have. Now,with the Sensex crossing 20,000 points,it is likely that the proportion of equity exposure in your portfolio is more than what you should have. Analyse whether you need to bring down the equity exposure to better align your portfolio.

(2) Understand the risks and your personal risk-taking capacity: Every retail investor should make investments with some cushion or “margin of safety”. When the Sensex was at,say 10,000 points or 15,000 points,there was a comfortable margin of safety because stocks were cheap. Today,at 20,000 points,there is less margin of safety because stocks are looking expensive.

If you are already invested,think about whether your investments have met your target price and if now is the right level for you to take money off the table. If you are comfortably able to meet the financial goals that you had set at the current price,may be there is no point in over-exposing yourself to the risk in the market.

If you missed the rally,and are now thinking of joining the stock market party,recognise that you might be joining at a time when the party might have peaked. We aren’t predicting a crash; all we are suggesting is that now might be a more risky time to put fresh money to work in the markets.

(3) Check your time horizon: Every time you invest,you must consider the time horizon across which you are thinking of investing. Is it for less than one year or are these investments towards your retirement which could be more than a decade away? If you are looking to make a quick bet,then now is probably not a good or safe time to invest. If,however,you are looking at a long-term horizon,then now might be a decent time to invest,subject to your personal risk-taking capacity.

(4) Be selective; choose high quality: In a bull market,everything starts going up,including companies that have weak long-term prospects or that were until recently on the verge of collapse. On the other hand,there will be high-quality companies in long-term sustainable sectors where your investments will probably have better prospects.

For instance,sectors such as banking,pharma,infrastructure are areas that will continue to see a huge boom given India’s personal income growth,demographics,and need for physical infrastructure to support our growth. If you can find good stocks or mutual funds in these sectors,you are better off investing in them,rather than in a fad or every IPO or new fund that gets launched.

Above all,investing is a skill that requires a lot of patience. Just because the market is high once again does not mean that it will never crash or decline again. Just be careful about how you want to invest your hard-earned money,and don’t ignore the risks just to make a quick buck.

—* iTrust Financial Advisors