When
liquidity drives stocks higher chances are that your portfolio will be sitting
on a huge profit.
The month of
April has been nothing short of exciting for retail investors on D-Street as
widely tracked Nifty hit a fresh lifetimes highs. The index which has been
making record highs since March rose to a fresh lifetime high of 9,273.90 on
April 5 last week.
The index
which has given a little over 12 percent return so far in the year 2017 is fast
approaching crucial resistance levels which could put brakes on the recent up
move.
The
liquidity driven rally has already pushed many small and midcap stocks to
record highs with stretched valuations. The problem with liquidity is that it
drives valuation upwards without any material change in basic fundamentals of
the company.
It is
crucial for long-term investors to select the right stock at a fair price to
make risk-to-reward ratio more favourable in the long term.
We spoke to
various analysts on how can investors’ maximise their return by avoiding these
five big mistakes:
Don't rejig
your portfolio on Geopolitical concerns:
Airstrikes
by American Forces on Syria last week caused a spike in oil prices and panic
across global markets including India. This was an unexpected change of stance
from US President Trump on Syria which earlier he had refrained from
interfering during his campaigning.
When events
like these happen investors should just take a step back from trading and allow
markets to stabilise first. Any geopolitical uncertainty triggers risk-off
sentiment which is not good for any equity markets because then safe havens
like gold, bonds usually hog the limelight.
“Markets
across the world reacted maturely and has sidestepped the issue at least
temporarily and small geopolitical situations do not disturb a mature bull
market unless the situation goes out of hand,” Jimeet Modi, CEO, SAMCO
Securities.
Never invest the whole corpus when
markets trade at peak:
For the
short-term, from the fundamental perspective, the market is fully valued.
Therefore, this is not the right time to make the bulk investment. Investment
should be made in a staggered manner and should be diversified across asset
classed.
“Retail investors
often make the mistake of jumping onto the bull bandwagon at the peak of the
market. They should not do that,” Dr. VK Vijaykumar, Chief Investment
Strategist at Geojit Financial Services told Moneycontrol.com.
“Further
investment should be made only selectively. Contrarian calls may be made. For
instance, this is the time to nibble at good quality pharma stocks. If at all
bulk investment is to be made, it should be done in balanced funds,” he said.
Avoid selling your gold and buy
silver:
When liquidity
drives stocks higher chances are that your portfolio will be sitting on a huge
profit. Don’t cash out from quality stocks just because the valuations might
show a different picture, suggest experts.
The rising
tide usually takes high-quality stocks higher first which would make their
valuation look stretched. Hence, one big mistake which investors should avoid
is to sell quality stocks especially when the stocks belong to the same
industry and buy stocks which might be trading at lower valuations.
'Good things
are not cheap; cheap things are not good.’ This rule is applicable to stocks
also. Good stocks are always expensive, suggest experts.
“Investors
should not sell off good quality stocks just because the valuations have become
expensive with regard to its’ own historical parameters. They can keep getting
costlier as the bull market progresses,” said Modi of SAMCO Securities.
“Investors
should not buy lower valuation shares by selling high valuation shares in the
same industry in the hopes of convergence of valuation, a lower quality shares
will trade at a lower valuation. This will give superior risk-adjusted
returns,” he said.
Do not miss entry points:
Anytime is a
good time to invest but the market also gives you good entry points which make
the risks-to-reward situation more favourable. Investors should always sit on
some cash which can be deployed when these dips occur.
All
corrections should be seen as a buying opportunity and not as trend reversals.
When markets correct, as they invariably do, poor quality small and midcaps
will be hit hard.
“Market
corrections happen at the most unexpected times; often due to unanticipated
external triggers like geopolitical concerns,” Vijaykumar of Geojit Financial
Services said.
“Syria,
North Korea, and the South China Sea are hotspots that might cause market
jitters. And, of course, there is President Trump and his maverick policies.
Investors should be watchful,” he said.
Do not buy stocks which are trading
at all-time lows:
Stocks which
are trading at all-time lows or even multi-year lows should be avoided because
fundamentals might not be supportive for fresh investments. If liquidity can’t
take these stocks higher then try and exit on any rally that you get. Always
stay with the winners.
“Don’t buy a
share touching an all-time low. Don’t sell a share continuously scaling all
time highs. ‘Exit from the weaklings’ and ‘Ride the winners,’ Vijaykumar of
Geojit Financial Services said.
“Don’t
average a crashing stock. It would be like trying to catch a falling knife. If
you feel that the market is likely to move up, but you are not sure which stock
to buy, buy the index. When the index moves up, you gain,” he further added.
