Time To Tread Carefully

The preelection rally in the stock market has taken benchmark indices to all time high level. Investors, especially FIIs, have been betting on a stable government, improvement in the economy and corporate earnings. Besides, there has been a significant improvement in macro numbers such as current account deficit as well as fiscal deficit. As foreign inflows are expected to remain strong, the market is likely to continue its good show going forward.

However, the current uptrend has 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 on the sidelines are wondering whether they have already missed the bus. Besides, all those equity fund investors who were exited in the recent past as well as those who discontinued their SIP investments in equity funds when the markets were down must be ruing their actions. Many of them must already be contemplating to re-enter the stock market either directly or through mutual funds.

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 right investment decisions. For example, there are investors who are not sure about long-term prospects of the stock market and hence face the dilemma whether to continue to hold on to their investments or to book profits. Clearly, the volatility experienced by them in the past and its impact on their portfolios must be weighing heavily on their minds. The question then is: what should be the strategy of investors in the current times?

Although there is a consensus about the stock market doing well in 2014 and even beyond, it may not be a wise decision to start investing aggressively in equities at this stage. Needless to say, if the general election results fail to meet the market’s expectation, one can expect a steep fall in the market. Besides, inflation could become a serious issue going forward as the recent hailstorm in Madhya Pradesh and Maharashtra have caused serious damage to the crops.

Therefore, investors will do well to exercise caution and follow an asset allocation model based on their time horizon and risk profile rather than investing randomly. This process needs to be followed irrespective of the fact whether one is investing in a rising market, falling market or in a volatile market. The key to success is to invest in the right kind of stocks or equity funds and in the right proportion.

On the other hand, inspite of uncertainties, it may not be wise to exit from the markets in a hurry. It is quite common to see investors rushing to sell their equity holdings every time the market presents an opportunity. While the objective may be to exit at higher levels and re-invest at lower levels, timing the market often backfires. Remember, by not being invested when the market begins a recovery, one could lose out on potential significant gains.

A long term investor should not allow certain events or short term market movements to disrupt his investment process. 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 on-going basis is to own a good quality portfolio and follow the discipline of regular investing.

While the idea is not to say that one should never sell, making frequent changes in the portfolio can result in lower returns on investments. This could be because of paying costs relating to buying and selling, higher taxes and missing out on sudden DS market rallies.