Unless you are on a suicide-cum-murder mission, you won't drive your car looking through the rear-view mirror.
Rather, your attention would be focussed beyond the windshield, on what lies ahead of you. Thus you would speed up, slow down or manoeuvre your car depending on the traffic situation in front of you.
Unfortunately, most people don't apply the same logic when investing in equity.
Many years of historical evidence proves this point.
Scenario 1
When the stock markets are in the middle of a bloodbath and share prices are collapsing every minute, you would rarely find a soul talking about buying shares. Dalal Street would be as deserted as a ghost town. And, instead of accumulating shares when they are available dirt cheap, people would be dumping their stock portfolio... in the false belief that they are cutting their losses.
Scenario 2
Euphoric markets produce, but naturally, quite the opposite result. There is more merrymaking than what you would normally see at a Punjabi wedding. Thousands and lakhs would be invested, even as the share prices become ridiculously expensive. This, at a time when the few wise men and women would be booking profits.
This behaviour, of looking behind at what has happened in the 'recent' past, is nothing but rear-view mirror approach.
In light of the above, let us analyze the current market scenario.
Over the past 15 to 18 months, since the change in the previous 'defunct' Government became imminent, stock market has been booming. The broader markets have delivered an annualized yield of around 30% tax-free returns since the last quarter of 2013. But more importantly, quite a few individual stocks have delivered 75-100%+ returns.
This, as in the past, is attracting lots of attention and money. Apart from increasing inflows in the existing accounts, there has been rapid addition of new demat accounts and mutual fund folios.
Beware!
Caution is advised as the market, currently trading at around 24-25 Price-to-Earning Ratio, is overpriced and expensive. This is clearly a 'Go Slow' signal and yet people are speeding up.
The logical question, therefore, would be 'Should one stop investing in equity till the markets cool down?'.
It depends. If your exposure to equity is already high, yes this is the time to push the 'Pause' button. Others may continue with their SIPs, maybe with a reduced outlay per month.
The reason why I don't advocate a complete stop, is because the stocks markets never follow a standard predictable trajectory.
So while, last year I had projected that Nifty could possibly hit the 12,000 mark on Jan 1, 2019, how we will reach those levels is totally and absolutely unknown, unpredictable and unforeseen. We may see the markets...
... jump to 12,000 by 2016 and then remain range-bound for the next 2-3 years; or
... languish at around 8000-9000 till 2018 and then jump to 12,000 within months; or
... yo-yo with many ups and downs in the interim.
In others words, "ends" may be fairly predictable but not the "trends".
Therefore...
... the best bet is to keep investing and staying invested, and
... depending on the market conditions, the pace may change from time to time, but not the direction.
Rather, your attention would be focussed beyond the windshield, on what lies ahead of you. Thus you would speed up, slow down or manoeuvre your car depending on the traffic situation in front of you.
Unfortunately, most people don't apply the same logic when investing in equity.
Many years of historical evidence proves this point.
Scenario 1
When the stock markets are in the middle of a bloodbath and share prices are collapsing every minute, you would rarely find a soul talking about buying shares. Dalal Street would be as deserted as a ghost town. And, instead of accumulating shares when they are available dirt cheap, people would be dumping their stock portfolio... in the false belief that they are cutting their losses.
Scenario 2
Euphoric markets produce, but naturally, quite the opposite result. There is more merrymaking than what you would normally see at a Punjabi wedding. Thousands and lakhs would be invested, even as the share prices become ridiculously expensive. This, at a time when the few wise men and women would be booking profits.
This behaviour, of looking behind at what has happened in the 'recent' past, is nothing but rear-view mirror approach.
In light of the above, let us analyze the current market scenario.
Over the past 15 to 18 months, since the change in the previous 'defunct' Government became imminent, stock market has been booming. The broader markets have delivered an annualized yield of around 30% tax-free returns since the last quarter of 2013. But more importantly, quite a few individual stocks have delivered 75-100%+ returns.
This, as in the past, is attracting lots of attention and money. Apart from increasing inflows in the existing accounts, there has been rapid addition of new demat accounts and mutual fund folios.
Beware!
Caution is advised as the market, currently trading at around 24-25 Price-to-Earning Ratio, is overpriced and expensive. This is clearly a 'Go Slow' signal and yet people are speeding up.
The logical question, therefore, would be 'Should one stop investing in equity till the markets cool down?'.
It depends. If your exposure to equity is already high, yes this is the time to push the 'Pause' button. Others may continue with their SIPs, maybe with a reduced outlay per month.
The reason why I don't advocate a complete stop, is because the stocks markets never follow a standard predictable trajectory.
So while, last year I had projected that Nifty could possibly hit the 12,000 mark on Jan 1, 2019, how we will reach those levels is totally and absolutely unknown, unpredictable and unforeseen. We may see the markets...
... jump to 12,000 by 2016 and then remain range-bound for the next 2-3 years; or
... languish at around 8000-9000 till 2018 and then jump to 12,000 within months; or
... yo-yo with many ups and downs in the interim.
In others words, "ends" may be fairly predictable but not the "trends".
Therefore...
... the best bet is to keep investing and staying invested, and
... depending on the market conditions, the pace may change from time to time, but not the direction.
