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Five things to do in the current stock market scenario-

My client was nervous. As the head of a leading consultancy firm he was aware of the state of affairs of the economy and specifically of his clients who were bleeding thanks to the impact of lockdown . He wanted to know my view on how to tackle the portfolio given the the stunning rally of stock markets across the globe . Like many a baffled investor he was sure that  the markets were in  bubble and unrealistic . While the rally has been sudden and unexpected there are justifications galore supporting it too. And as with every investor my client was  afraid that there will be reversal to the mean.

What should investors do when Nifty is reaching new highs daily?

I will share my two cents on how to deal with the current situation.

1.       Prepare yourself for volatility especially in equity – We aren’t exactly in a cheap market reeling from covid hit economy. Valuation ratios are on the top end of acceptable ranges and reversion to mean in the form of correction/crashes is inevitable. You must decide how much risk is acceptable to you basis your financial situation. For risk averse investors I recommend bringing down allocations in equity  , booking profits or rebalancing

2.       Remember that there will always be opportunity to invest in good ideas -Bull or bear market, the patient investors always wins. Opportunities for investment will come. Wait for them. Research, understand and reflect. If you know what you own or want to own, market movements are of no consequence .At best they will offer significant opportunities.

3.       Focus on a good asset allocation plan. Rigorously re-allocate. Evaluate minutely your choices and rationale. If you are doing SIPs, rejig, relocate depending on your financial goals and cash flow requirements. Rebalancing portfolio will help you bear losses in the midst of volatile markets. A good mix will also ensure lower volatility of overall returns.

4.       Cash is an ASSET!!! It is your gunpowder, the arsenal u collect to use at the right opportunity. Without cash you will have to accept normal returns on your asset of choice .Market timing is impossible but you can look for value. While you are looking or in the absence of value choose cash. Also should you be worried about your future cash flows, then bumping up your contingency reserves with cash savings is great. You can park cash savings in the form of bank fixed deposits /liquid funds.

5.       Accept Regret , Don’t Act on it   - Regret is part of stock market investing .Didn’t buy or didn’t buy enough , didn’t sell on time, sold early and all variations in between are normal .Warren Buffet  missed the entire tech rally  of the last  decade, didn’t he ? And he is the master investor of our times! FOMO or the fear of missing out can lead itself into terrible investment mistakes and losses that are irrecoverable. If u have missed an opportunity another one will come your way.

While I write this piece SEBI has decided to make it mandatory for Multicap funds to move minimum 25% in Small Caps and minimum 25% in midcaps, causing quite a flurry in fund management circles.

Some were gleefully cheering the move as it would lead to a rally in already richly priced quality midcap and small cap funds, while others lamented that it will cause immense investor grief and mistrust. AMCs plan to make presentations to SEBI against this diktat, with recommendations of mergers /change in classifications etc. I will update readers when there is more clarity, and leave with a warning that it is a bad idea to jump into midcap /small cap via funds or directly in anticipation of this RS.42,000* cr bonanza which might not materialize.

 * Assuming 30% of the  1.46 lakh cr invested in multicaps will need moving to mid and small cap stocks

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Comments

  1. JulienSeptember 13, 2020 at 9:31 PM

    Hey Kavitha, Referring to Point #4 - The RoI in FD's is very low, why would someone park their cash in FD's in this scenario, what's a better alternative for the common man to earn a good return for his cash?

    ReplyDelete
    Replies
    1. Kavitha MenonSeptember 16, 2020 at 3:54 AM

      We invest in cash assets for safety first and returns later. Bank FDs are temporary parking lots and low returns reflect lower risks.Also super convenient. If you think you are going to stay invested for long time in cash , then low duration funds or dynamic bond funds can offer better tax adjusted yields than FDs. You must consult a financial advisor for this.

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