Time To Tread Carefully

Over the last few weeks, the stock market has turned from a declining market to a rising market. The most astonishing part of this rally has been its pace as well as its breadth. Normally, during an upward move in the stock market after a prolonged decline, large-cap stocks perform better than mid-cap as well as small-cap stocks. However, the current rally saw mid and small-cap stocks outperforming their much fancied large-cap counterparts. In that sense, the spurt in the stock market has been peculiar and surprising. The fact, however, is that the confidence in mid and small companies at this stage doesn’t seem to corroborate with the available evidence of the continuing struggle in the economy.

The current uptrend has, in a way, made decision-making difficult for investors. In any case, it is always difficult to participate in a new uptrend in the equity market. All those investors who have been waiting for the stock market to bottom out to start investing again are wondering whether they have already missed the bus. Those who discontinued their SIP investments in equity funds, fearing further declines, are already contemplating to restart their investment programme.

In other words, it’s a tough call to make for equity investors these days. The problem has always been and remains that there are too many variables for anyone to consistently make the call. Small wonder then that many investors are facing a dilemma as to whether this is the right time to book profits. Clearly, the steep fall witnessed by the stock market in the past and its impact on their portfolios is weighing heavily on their minds. The question then is: what should be the strategy of investors in current times?

Though there are signs of modest recovery in the global economy, it may be too early to bank on it for investing in the stock market. Besides, it is quite common for the stock market to rise impressively and then fall to almost lose all the gains during the periods when it is in the process of bottoming out. Therefore, it may not be wise to invest aggressively at the current levels. Investors will do well to exercise extreme caution and follow a strategy of investing in parts, if at all, at this stage. [PAGE BREAK]

On the other hand, in spite of uncertainties, it may not be wise to exit from the markets in a hurry. Remember, it is not a smart strategy to make changes every now and then to take advantage of the short-term market movements. For an equity investor, one of the major challenges is to handle market volatility efficiently. The surprising part is that though ups and downs are a common part of investing in the stock market, not many investors have the temperament and the skill to handle the volatile times.

While it is practically impossible to predict bull or bear markets, investing in both carry risks of varying degree. Therefore, the right way to invest in equity funds is to follow an asset allocation model based on one’s time horizon and risk profile. This needs to be followed irrespective of the fact whether one is investing in a rising market, falling market or in a volatile market. For example, investing in equity or equity funds for a time horizon of one year can be a risky proposition even when the markets are expected to perform well. Similarly, investing for the long-term in equity funds invariably works in an investor’s favour provided he/she follows a disciplined approach of investing in them. The key to success is to invest in the right kind of stocks or equity funds and in the right proportion.

A long-term investor should not allow short-term market movements to drive his strategy. In other words, if one invests in equity as a part of one’s retirement planning, tracking price movements on a daily basis makes no sense. The most important factor to ensure success on an ongoing basis is to own a good quality portfolio and follow the discipline of regular investing.