NEW DELHI : When stock markets are on record highs in a sluggish economy, retail investors often find themselves in a dilemma -- to stay put or exit after booking a profit. The S&P BSE Sensex breached 41,000-mark, its all-time high this week. The broader Nifty also crossed the 12,000 mark. Led by this, the market capitalisation (m-cap) of the BSE-listed companies stood at ₹154.64 trillion, up around ₹12.45 trillion from a year ago.
The current rally comes in the backdrop of weak macro-economic indicators. Despite sharp decline in the core sector, lower GDP forecast, fiscal slippage, lower consumption, the benchmark indices have been able to sustain the all-time highs. While some analysts are optimistic about the rally and the numbers, some analysts turn cautious.
“A bull market is the most amazing and awaited phase in the investing journey of an equity investor. This is the phase when he witnesses unbelievable gains being made in his portfolio. At the extreme level it can create a sense of euphoria which is enough to make even the most seasoned investor forget his/ her lessons of equity investing," says Rahul Jain, Head Edelweiss Personal Wealth Advisory. In such a scenario, retail investors should avoid making mistakes which they might regret in future.
Based on what experts say, here are five mistakes a retail investor must avoid, that may burn your fingers in the stock market:
Sensex vs your portfolio: Investors shouldn’t get swayed just by the numbers in a bull market. The benchmark indices may not reflect in your portfolio and there may be a need to review it.
“While the benchmark indices have been touching new highs, not many investors’ portfolios are making money. The peculiarity in the current market has been the concentration of the market performance in select Nifty stocks and the big divergence in the benchmark’s performance both within as well as versus mid-cap and small-cap indices," says Siddharth Khemka, Head – Retail research, Motilal Oswal Financial Services (MOFSL).
Premature exits: Equities are long-term assets and booking profits prematurely is another mistake investors must avoid. While some analysts believe that investors should book profits and rebalance their portfolios at regular intervals, others advise caution.
“A bull market can skew the investment portfolio towards equity. It is always better to rebalance the portfolio by booking profits in equity at regular intervals and move them into debt. This will ensure that wealth created by equity is realized and remains protected," says Jain.
Investors must take an informed decision. “Profit booking should not be done solely on the basis of price movement; retail investors should try and understand the business fundamentals before taking such a decision," said Hemang Kapasi, portfolio manager, equity, Sanctum Wealth Management.
Trading gold for bronze: While the indices are at an all-time high, the market breath could be negative. In such a scenario investors, generally tend to look for bargain buying in names which have fallen down sharply as they believe that these stocks are available at cheap/lower valuations.
“One should avoid looking at just valuations as a key criteria and focus on quality of business and management – even if they are trading at premium valuations. We believe that the current market would continue to reward quality and growth and there may not be a broad-based rally," says Khemka.
Taking uncalculated risks: Make hay while the sun shines? You may burn your fingers if you follow this tip blindly. “During a bull run investors get tempted by the quick and lofty returns which can fuel the investors’ greed to a level that they are willing to compromise on their asset allocation. Investors often get the impression that they can take more risk with their money as the probability of making a loss is lowest. Remember equity continues to carry high risk bull run notwithstanding," says Jain.
Timing the market: Timing the stock market is almost an impossible task especially for retail investors. And as the saying goes, timing the market is a fool’s errand. “The biggest limitation of trying to time the market is if an investor misses out on handful of high return days, the returns can look radically different. For instance, over the last 20 years since 1999, Nifty has delivered 11.4% annualised compounded returns. In the process of timing the market, if investor had missed only 10 best performing days, the annualised return would have been only 7.3%. In fact, if investor had missed 30 best performing days, the annualised return would have been mere 1.8%. So, timing the market for retail investor is a futile exercise. Retail investor should instead opt for rupee cost averaging strategy wherein a fixed investment takes place every month regardless of what is occurring in the financial markets thus, avoiding the impact of sharp market movements," Kapasi said.
