Take part in market rally or sit it out, it all depends on your emotions

The volatility in the markets has posed more questions than answers. The 30-share BSE Sensex from levels of 42,000 in January this year went down below the levels of 26,000 in March and then moved up to 42,597 as on November 9, 2020. In September, 1.3 million demat accounts were opened, which is the highest in the year so far, indicating increased retail participation in the equity market since the lockdown to contain the coronavirus pandemic began.

So, will the markets continue to go up? This is anyone’s guess. “Irrational exuberance’ is being noticed and at some point it has to stop. One needs to have the processes both in thought and action and act swiftly. Alternatively, one can sit out—just as a few of the largest investors across the globe are doing—and wait for this rally to change course. As an investor, check your asset allocation, cash flow needs and not succumb to the feeling of FOMO (fear of missing out).

Remember, in the year 2000 just as the markets were going up, based on the dot-com boom, one of the largest investors sat on the sidelines for the entire period. And when the markets fell drastically in the subsequent year, he picked up some good stocks at throwaway prices.

Central banks across the globe have pumped in liquidity into the markets. In countries such as the United States, the government has directly credited money to its citizens more than once since the outbreak of Covid-19 pandemic. In India, too the government has come out with stimulus packages to drive consumption and boost the economy.

What should investors do now?
The answer is never simple. If you like the momentum, take part in the rally and be swift to take the profits / losses. If the fundamentals of the economy viz-a-viz the stock market rally is causing discomfort, stay on the sidelines for whatever time it takes and invest when you believe the market prices are more justified.

One of the sectors which will hold on for in the next few months are pharma and consumer staples. Also, if one is looking at stock market volatility, having gold in the portfolio is highly recommended, besides the allocation in liquid mutual funds. Any money you need for the next 18-30 months should be invested in fixed-income instruments, which has ease of liquidity and also in cash.

The Nifty Price-to Earnings (PE) ratio is now close to 33, which is more than the levels it was in early March 2020 (25.34) and at its lows in March 2020 it was 17.15 .The economy is slowly opening up for production and consumption and work-from-home can lead to a totally different approach towards work, which has an impact over multiple levels. However, both domestic and international travel may not be the same for quite some time.

Investing need not be a zero-sum game. Each one of us can be a winner in investments, provided we do not fall prey to irrational exuberance or doomsday messages. There is going to be a shift in the Indian economy and growth will fall as compared with last financial year. But we can retain the belief that this too shall pass. We tend to underestimate what can be achieved over a longer period of time (say 5-10 years) and overestimate, what can be done in a shorter period of time (say 0-2 years). The investor’s best friend and worst enemy is the investor himself. Investing is more of an EQ (Emotional quotient) matter as compared to IQ (Intelligent Quotient).

The writer is managing partner, BellWether Associates LLP