How to Invest at A MARKET HIGH
It is that point of the year…the stock market is at its all-time high. All this while you waited for this opportune moment to begin investing. But wait! Don’t lose yourself in the exuberance all around. You never know where the market is heading the next moment.
The questions remain unanswered:
- * Is the market going to rise further or is it going to fall?
- * Should you be a skeptic and wait for a correction or cheer up and invest right away?
Waiting for a market correction to start investing would result in a loss of opportunity. This is exactly why you should get going immediately. If you keep waiting for a market correction, you will stay stuck. This is why you should invest, even at a market high, as the markets are only going to go higher. Sure, there will be a few hiccups on the way, but the general market trajectory is going to be largely upward-looking.
In case you are a novice investor, this time demands higher levels of composure from your end. Instead of placing impulsive bets and repenting later, sit down and formulate an investment strategy.
Review the entire portfolio
When you initially constructed a portfolio at the beginning of the cycle, markets must have been quite different. Now that so much time has elapsed in between, chances are the valuations might have changed.
The reasons which made you buy that bunch of stocks might no longer be existing. The market leaders might have changed ranks. In such a situation, sticking to laggards might end you in losses. So, use this time to review your entire portfolio. Weed out the stocks which don’t seem valuable anymore.
Re-balance the portfolio
You need to know that market volatility affects your portfolio’s asset allocation. Your original asset allocation might have been in a ratio of say 50:50 (equity: debt). But the steadily rising markets might have skewed the original allocations.
It means that now the ratio must have become say 70:30 (equity: debt). On one hand, it may seem like a lucrative opportunity to accumulate more wealth. But if it is not in line with your risk preferences, you may land in trouble.
You got it right! Your portfolio has now become riskier than you actually can digest. If you don’t want to carry a riskier portfolio, then it is better to re-balance it. Re-balancing involves bringing the skewed allocation to its original asset allocation of say 50:50 in this case.
Diversify your portfolio
Your portfolio might be composed only of small-cap or mid-cap stocks. In a rising market, a concentrated portfolio might increase your chances of losing money. When markets are high, you need to diversify. In diversification, you need to include stocks of different market capitalization. You can invest in large-cap stocks which tend to be stable during such volatility.
Start SIP in mutual funds
For first-time investors, trading in the stock market can be tricky. If that is not your ball game, then go for equity mutual funds. Equity mutual funds give a similar kind of investment experience; although with greater diversification and professional fund management.
You may think of starting a Systematic Investment Plan (SIP) in equity funds. In this, you will be consistently placing smaller bets. Over a period, it will give you the advantage of rupee-cost averaging.
Never invest in something you don’t understand
One mistake you shouldn’t commit is investing in a complicated financial product. Market highs are usually accompanied by fund houses launching sophisticated offerings. You might come across a lot of New Fund Offer (NFO) during this time.
These offerings might promise sky-high returns. However, you shouldn’t get enticed by the lucre, especially when the product offering is not transparent. Ensure that you understand what you are getting into before investing.
Moreover, invest in a financial product that has an investment history of 5 to 10 years. Even if you want to take the risk, don’t invest a lump sum in a single stock or fund.
Mapping specific mutual funds to specific goals will help you not only choose mutual funds correctly but also keep track of them in a better way. You can choose mutual funds depending upon the term and the risk profile of the goal.
All said and done, market highs and market lows will come and go. The volatility shouldn’t bother long-term investors. You should keep an eye on your goals and invest systematically.