It’s easy to follow the crowd, but what helps the investor more is a disciplined approach
Most retail investors have a love-hate relationship with the stock markets. At present, surely many more would be hating equities as they see little hope of their investments giving good returns in the near term.
And, in spite of the 30 per cent rise in the past one month, many would still be wondering when the stock markets will regain the high levels seen in 2007. After all, the depression has set in so badly that only a few will look at the nearly 50 per cent correction as an opportunity to make great money in the long run.
This scenario occurs in every boom and bust, because retail investors are never able to take advantage of either.
Typically, investors have one of the following approaches:
Going with the crowd - A herd mentality is a very common feature. Retail investors rely, more often than not, on friends and colleagues for tips because there is a sense of belonging. That is, when people around them invest, they also want to join in on the fun.
However, following the herd has its problems. Many times, the crowd may not be correct. And when markets tumble, such investors find themselves in deep trouble.
Lack of moderation - Alan Greenspan called it 'irrational exuberance'. And, typically, this situation is observed in a bull run when a large number of investors enter the market despite no compelling reason.
As a result, stock prices go over the moon. Some investors even take loans to invest. But as soon as the sentiment changes, they swing to the other end and rush to cut their losses.
Retracting into a shell - When markets have corrected sharply and valuations are really compelling, retail investors are unable to take advantage as they are in 'sulk mode'. In fact, that's really the time when they should be investing and creating a strong portfolio.
For instance, when the Bombay Stock Exchange Sensitive Index, or Sensex, went over 20,000 points, there was a lot of enthusiastic investing. But now that it is down to 10,000-11,000 levels, there is an unwillingness to buy. In reality, a correction was overdue when the Sensex hit 20,000 points.
At current levels, the downside is much less. But invariably, there will be theories about how markets will go down further. Instead, it makes much more sense to moderate and continue investing in good as well as bad times.
Watching from the sidelines - When the fear factor is at play, investors prefer to watch the scenario unfold from the sidelines. And many even forget to follow the market.
Also, there are those eternal fence sitters, who keep on wondering if this is the right time to invest.
Flavour-of-the-season syndrome - Sometimes it is gold, mid-caps, debt, real estate and so on At every stage, there is a favourite. At present, investors are looking at debt and gold. It's no wonder then that gold prices have shot up.
It's extremely important to spend some time studying the asset class and where it fits in one's portfolio.
Lack of diversification - A concentrated portfolio is much more vulnerable to shocks. For instance, in the recent bust, many investors got stuck with realty stocks.
Of course, the lucky ones may be able to survive this. But, for most, it can misfire badly.
On the other hand, here is what investors should actually be doing:
Asset allocation - Proper allocation of assets decreases risks, increases portfolio return and makes it more suitable for the concerned investor in terms of liquidity, tenure, timing of payments, ease of operation, etc.
A proper asset allocation and rebalancing it from time to time brings in the discipline and ensures that the investor does not go overboard due to personal prejudices.
Post-tax returns - Most talk about just the gross returns, as if it is their real return. So much money would probably not flow into fixed deposits and other small savings investments if the effect of tax is understood and factored in.
Risk factoring - Stock markets are always risky, but the risk in the system varies at various points. For instance, the risk of the markets going into a dive is comparatively lower now, as it is gyrating at around 10,000 levels. At higher levels, risks would definitely be higher.
Also, risks have to be understood in relation to one's age, situation in life, time horizon and proportion of assets that will be exposed
Of course, there is a lot of uncertainty about the economic outlook, the extent of any further economic shocks, job scenario and overall market performance. But then, investors need to follow the basic principles even more diligently than ever in this market.
The idea is to survive and emerge stronger.
The writer is a certified financial planner
