Rishabh Parakh is a Chartered Accountant by Profession and a founder and Chief Gardener of Money Plant Consultancy, an established firm based out of Maharashtra with operations expanded to Singapore & the UK. He is also an author of the Book titled "Financial Spirituality".
The BSE Sensex made history today by crossing the 50,000-mark, although it closed 200 points lower. Unlike earlier times, there are different reactions to this market high. On the one side, there are people who are feeling left out because either they never invested in the market, or were waiting for the market to correct or their investment is negligible. On the other, there are existing investors who are sitting on some good profits, and fearing market correction want to pull out to reinvest later. So let me tell you how to tackle this market high.
Know the facts
Remember when the stock market created an all-time high when it crossed 5,000 for the first time on October 11, 1999, and then it crossed 10k, 20k, 30k, 40k, and today it has hit the half-century mark? It will eventually, also hit 100,000 points. As humans continue to make progress, the stock market will keep scaling new heights. Statistically speaking, according to me, with a 10 percent CAGR (Compound Annual Growth Rate), the Sensex is bound to touch the 100,000 marks in the next seven years.
What should an existing investor do in this situation?
1. Timing the market and the belief that you can sell now and buy at dips is a trap. It works for those who have mastered this art and know exactly when the market is going to fall, and can time their sales and purchases accordingly.
2. Stay invested unless you have a goal that is due in the next year or two. In that case, booking profits is strongly advised.
3. Re-balance and re-allocate your portfolio but only after you do the due diligence of your risk profile and financial goals.
4. Now is a good time to correct your mistakes by letting go of a lot of dud stocks and mutual fund schemes not suitable for your portfolio.
5. Book profits only if you need the money.
What should a new investor do in this situation?
1. First things first, avoid FOMO or the fear of missing out. Do not invest because you have not been able to invest earlier for varied reasons and are now feeling left out. This is not the end of the Sensex journey. As mentioned earlier, there is a lot more left to see.
2. Avoid being over adventurous by deploying your hard-earned money at this price point. Remember that your investment strategy should be designed on the basis of your financial goals and risk profit, and not on the basis of the level of the Sensex.
3. Invest gradually. Never invest in one go, especially at this market level, unless there is a huge opportunity in terms of a market crash, else always invest in tranches. For instance, if you have Rs 10 lakh to invest, invest Rs 2 lakh first and the rest in tranches.
4. Look at year-to-date returns. Many people are getting lured with the wrong data points. Therefore, it is important to look at yearly returns. So assume that there is a stock which was trading at Rs 100 in the month of January 2020 that fell down to Rs 50 in March 2020. Now the current market price of that stock is Rs 120, and there are many who are talking about how this stock has given 140 percent return in no time. But that is not the right way to look at it. Look at the year-to-date returns of this stock which is 20 percent and not 140 percent.
5. Diversification, when it comes to asset classes is important but not with respect to stocks. Investments across different asset classes like fixed instruments, real estate, gold, equity, and so on, is necessary, but in the stock market, select top sectors you are bullish on based on your due diligence. Then invest in not more than five or six stocks for real wealth creation. Don’t make the mistake of investing in 20 to 30 or more stocks, stick to quality stocks. Go for some good mutual fund schemes to create a solid equity portfolio.
The writer is a chartered accountant and founder and chief gardener of Money Plant Consultancy