Stock markets are at all-time highs. This tempts new investors who had missed out on the astonishing growth since the depths of despair in 2020. Sensex, after rapidly falling below the 28,000 mark, has now surpassed 60,000 in barely 18 months. The Nifty50 has gone from around 8,800 to surpass 18,000.
There’s no dearth of stocks or mutual funds which have appreciated multifold in the last 12-18 months, even as real returns from interest-generating instruments such as bank deposits have turned negative. Clearly, some market exposure is the need for most investors. So where and how do they get started?
Know your risk tolerance
Many popular stocks today are overpriced. Investors are paying increasingly higher prices to buy stocks of companies whose profitability may not be commensurate with their share price. When markets are overpriced, they correct usually to a level where prices sync with profitability and other realities. This uncertainty with price movements keeps conservative investors away.
If you’re getting into the market at an all-time high, you need to be prepared to suffer losses immediately in a correction. You don’t need to book your losses, but your wait for returns may be longer than someone who’s been investing for long. You need to ask yourself whether you have an appetite for these high risks, and whether your financial situation allows you to suffer these losses. Invest in stock markets only if you can stomach the volatility. Most investors can—only if they remain invested for the long term, which is where the best returns may be.
Know why you are investing
Be driven neither by greed nor fear; just by a clear understanding of what you’re getting into. Small investors need to plan their investments and make them goal-based. For example, you want to buy a blue-chip and hold on to it till your retirement in 20 years. Or you want 20% appreciation from a stock that’s going to peak soon.
Goal-setting allows you to set expectations in terms of returns and investment tenure. This will keep you from panicking when the markets turn choppy. You’ll then be driven neither by greed nor fear, just by the reason you made the investment.
When markets are at an all-time high, it would be very risky to make lump-sum investments. Your favourite stock may have quadrupled in a year. But there’s no chance of another quadrupling in the next 12 months. Therefore, rushing to buy such stock with all your money is fraught with risk. It may make more sense for you to buy small quantities systematically over a longer period which will allow you to lower price risks, and even allow you to buy higher quantities of the stock as it falls.
Pick your instruments carefully
Stock investing is for those who are at ease with the research they have on any stock. You can create your own research or avail it from an expert. Either way, the decision to buy, hold, or sell any stock should come from data and information. It’s not easy to make these value judgments, and even seasoned investors fail all the time. But if you’re unable to track the performance of the companies you’re interested in, it may be wise to leave those decisions in the hands of professional fund managers. So buy a mutual fund suited to your investment goal. The risks are lower and the upside may be just as good if you pick the right fund.
Buy the haystack
Investors seek value. We’re perennially looking for options that may provide the best results for us with the least risk— that one stock that may change our lives. Finding that option is not easy. If you do not want to be concerned with finding that needle in the haystack, buy the whole haystack.
Indeed, that’s what John Bogle, the inventor of index funds said. According to him, in the long term, small investors may be better off buying an index (such as Nifty50) instead of the individual stocks that make the index. Such a fund allows you to buy good companies across sectors and industries, lowers your risks and costs, and gives you better long-term returns compared to fixed income instruments.
Lastly, if there’s an information overload and you’re unclear about where to begin investing in the markets, consult an investment advisor who may be able to chart a path for you based on your life goals.
The writer is CEO, BankBazaar.com