3 Things To Do When Market Is At Record Highs
Stock markets around the globe are rallying as investors continued to bet on risky assets and higher returns on the back of positive vaccine news, the possibility of stimulus package announcements in developed countries, recovery in corporate earnings and better than expected economic data.
In India, a surge in inflows from foreign institutional investors aided the rally.
In November, foreign portfolio investors (FPI) pumped a net of Rs 60,358 crore into equities, the highest ever amount invested in the equity segment since the FPI data has been made available by the National Securities Depository Ltd (NDSL).
On Friday, BSE's Sensex surpassed 45,000 level, while NSE's Nifty 50 climbed above 13,200 on better-than-expected GDP data and a dovish monetary policy commentary from RBI. As many as 65 stocks in the BSE 500 index rose 10-50% in only 4 sessions including Tata Power, Maruti Suzuki, Sun Pharma, Adani Enterprises, Tata Chemicals, and Adani Power.
More than 250 stocks hit 52-week highs on Friday, of which 8 were Sensex stocks, while over 400 stocks hit upper circuits.
Markets are in a state of euphoria and some may feel like they are missing out on the gains while some other may be wondering if it is a bubble.
Trying to predict the markets or the future is impractical or rather, impossible. Nobody can predict the market's movements or moods.
Here are 3 things to do when markets are at record highs.
1. Not pour large amount on rallying stocks to make quick gains
Daily headlines on stock market record highs may tempt you to chase the running wagon of a historic rally to make quick gains. However, this must be avoided at all costs as there is no way to time the markets, especially if you are not a market expert.
This is because, if you do not manage to exit at the right time, you will make losses when the stock prices eventually make a healthy correction.
Even long-term investments could be risky considering the fact that most stocks are now at a higher valuation, lowering the potential to make significant gains.
2. Continue to stay invested in quality stocks
When gains in good quality stocks have been overstretched, it may seem like an opportunity to sell large-cap stocks to buy less valued mid-caps and small caps.
While investing in mid or small caps is not a bad idea considering their potential to grow, the purchase should not be done at the cost of risking the stability of quality large caps. You can invest in promising small and mid-cap companies with additional money rather than selling well-performing large caps, as doing so will misplace risk appetite.
Small caps are high-risk-high-reward opportunities. By adding them to your profile of existing quality large caps, you are diversifying risk, but choosing small caps over large caps can materially change your risk profile.
3. Stay invested in your mutual funds
Mutual funds are actively managed by experts whose job is to balance risks and deliver the highest possible returns to its customers.
If you have invested in any type of mutual fund and if the returns may seem low compared to the rally seen in stock markets at large, know that the changes in the valuation of the fund are expected to not be dramatic, due to their risk-balancing efforts that prevent a sudden slump when the market falls.
If you are invested in equity mutual funds, they will create wealth in the long term, providing risk-adjusted returns. You will need to be patient and continue with your SIPs (systematic investment plans) that track your fund's growth all the time.
Conclusion
Approach with caution as you invest in an overly active market. Do not let emotions control your decisions and stick to what you know/understand, rather than invest in a stock that is rallying without any change in the company's fundamentals.
Emphasize on your financial goals rather than making easy money.
Disclaimer
The article is purely informational and is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.