So many people invest in the stock market hoping to benefit from the rise in stock prices. This is when many investors rush in to put their money without realizing how they may succumb to unforeseen challenges such as buying at higher valuations and the possibility of market slowdowns due to unanticipated corrections in the long run. The sudden swing from the bull run to a prolonged bearish phase can create unwarranted fear and confusion in the minds of investors, especially, those who are operating new in the market.
It is not easy to take a call on market directions. No one knows how the market would sway in the coming days or months. However, following certain basic principles may help investors tackle the volatility synonymous with a rising market environment.
Stock valuations are high in a rising market. This results in a lower profit margin as investors tend to pay more towards stocks and funds. This translates to low or negative returns in the short run. This myopic view of investment abstains from investing with a long-term view. Generally, such investments must be limited to three to five years as investors ignore the short-term volatility and look for immediate returns.
However, those with a long-term view must not invest their money so hurriedly, lest they fall short of this surplus money in the next one to three years when the market goes through recurring corrections.
Don’t fall prey to emotions
More than logic and statistics, investors’ emotions propel the market in a certain direction. Negative sentiments surrounding geopolitical tensions have recently prompted many investors to pull out of the market. This caused the markets to fall down rapidly. It is important to abstain from emotions while investing in the market. A stoic, impartial view towards investments can go a long way in helping many achieve their long-term financial goals. A long-term asset allocation plan is a must to create a decent corpus in the future.
Not succumbing to the volatility in the market may be difficult but not at all impossible. Simple remedial measures taken by investors can help shave off the feeling of uncertainty during tumultuous market conditions.
Choose SIP over lump sum investments
Investors must not stay away from investing when markets rise. Rather, they must invest in small amounts through systematic investment plans (SIPs) over a period between six to 12 months instead of putting money in lump sum amounts. This allows them to stay invested unbiased on the market volatility while mitigating the risk of major losses in case of a sudden market fall.
Choose business over hype
Social media platforms are abuzz with news of stocks that have shown unprecedented growth. Ironically, very few investors discuss the pitfalls that they witnessed and experienced while investing in shares whose prices grew on the back of unwarranted rumours and hopes. To experience growth, investors must assess the quality of businesses. A quality business with a strong potential for growth is bound to grow, thereby, lending a long-term compounding effect.
An essential tenet of investing is to buy companies with a deep business moat and consistent cash flows to ensure long-term compounding of profits. Ignore the short-term pain; just focus on companies with strong fundamentals to generate returns that beat inflation in the long run.
Don’t ignore valuations
It is not enough to view the fundamentals of a company while investing. The price you pay for the stocks matters too. To ensure a good profit margin, ensure that you pay the right price for businesses. Great companies always trade at premiums given their growth rates and exceptionally higher return ratios. While some businesses may require investors to buy their stocks at premium valuations, overpaying for any particular stock or share may result in erosion in returns.
Say “No” to stocks of weak businesses
Not all cheap stocks are worth your consideration. While buying any stock, the right valuations matter. This is why investors must look beyond just P/E or P/B multiples. Do not buy a stock just because it is cheap. Check the business potential of any company before putting your money into it. Cheap companies often prove to be value traps and nothing else.
However, in-depth research into the company’s financials highlights low growth rates and return ratios due to poor sales or the inability to encash on growing business opportunities. Investors must avoid putting money in such companies at all costs as the prices of these stocks are unlikely to go up owing to their discounted market returns during all cycles both in the short and long run.
Invest but with care. This mantra will prevent investors from putting in their money blindly. The idea behind investing is to diversify your portfolio among less risky assets including fixed deposits and debt funds while also earning from stocks and equities after a lot of evaluation and deliberation over the latter’s potential and credibility in the market.