When bears come calling, take a holiday from active investing. But, continue your SIPs.
In the past month, there has been a steady flow of bad news for stock market investors. The Bombay Stock Exchange's Sensitive Index, or Sensex, is at a 15-month low. Investors’ wealth has eroded a whopping Rs 9 lakh crore. Even top companies have suffered, with the top 10 losing a third of their market capitalisation. The worst news: There is more to come.
In such circumstances, retail investors find it very difficult to keep faith in phrases like 'long-term benefits of investing in stocks'. However, instead of giving yourself ulcers by looking at the index/stocks you own on a day-to-day basis, there are some other ways to deal with a market on a downward bias. A few things you should not be doing:
| JARGONS TO STAY AWAY FROM: |
| * BOTTOM FISHING: Picking a stock that has witnessed a major fall, on the belief that its price has dropped due to panic selling |
| * VALUE INVESTING: Buying a stock for less than what it is actually worth |
| * COST AVERAGING IN STOCKS: Regularly investing a fixed sum irrespective of the market trends |
Don't invest what you can't lose: In the next few months, you may have to live with phases of sharp correction, perhaps even a rebound from time to time. But it may not exactly be an opportunity to invest. Invest only the surplus you are willing to lose and don't make it a part of the portfolio. At the moment, it is a difficult market for even the most seasoned investor.
"Invest only if you can afford to lose money. In the short run, it looks too dicey for a retail investor," says Saurabh Mukherjea, head of institutional equities at Ambit Capital.
52-week low means little: Cheap is not exactly good. As many as 1,493 scrips hit their 52-week low on the BSE in August. Among these, 100 stocks belong to the A-group. Under normal market conditions, their valuations may seem attractive. But in such a market, there could be more battering left. In fact, there are 654 stocks at their two-year lows as well, of which 12 are from the Sensex. So, no one knows where is the bottom.
Alex Mathew, head (research), Geojit BNP Paribas Financial Services, says, "Don't try to average these scrips. If you can suffer the loss, reduce your exposure or hold on to them. A lot of these smaller companies have concentrated shareholding, which could mean further fall."
Don't stop SIPs: Prashanth Prabhakaran, president-retail broking at India Infoline, warns those who invest without a plan and no particular goal in mind. They are likely to suffer the most in these conditions. Typically, investors get jittery and base investment decisions on impulse. Some investors having a systematic investment plan of two to three years opt out in a falling market. Unfortunately, by doing so, they lose out on the best averaging opportunities during a market crash.
Say no to next mid, small-cap multi-bagger: Although there's been a blood bath all across the board, there are enough market experts picking stocks. Should you believe them? The answer, at this point in time, is NO.
At present, even a Reliance or State Bank of India is available at 30 per cent less than what it was last month. So, why bother with cheaper stocks? "Large cap stocks have more capability to withstand any crisis and their share prices tend to fall less than the smaller stocks. Another reason to stay away from smaller stocks is that they have low liquidity and during a market fall, shed much more than the larger scrips," says Rajesh Saluja, CEO and managing partner at ASK Wealth Advisors, adding once the reversal begins, the large cap scrips move up first and faster than mid-cap and small-cap stocks.
Avoid highly leveraged companies: This is slightly more technical. However, if wishing to enter, look at companies with lower debt on their books. Given the market volatility, Deven Choksey, managing director at KR Choksey Securities, is asking his clients to stay away from companies with high debt on their books. "A company with a positive debt equity ratio and with good amount of cash reserves can use the cash in their times of need, unlike a company that is highly leveraged and has to pay off its debts," he says.
