Sometimes retail investors try to sell all their profitable positions when they hear that markets have hit all-time highs.
Some of the stocks have surged over 700 per cent on a year-to-date basis. These figures excite retail investors and often many take inappropriate decisions in a hurry, which may affect their portfolio return later.
“An all-time high level of stock market does not always signify high risk. The risk element has to be a function of valuations that the market trades at. Most important fact is what the markets are factoring in and whether reality is close to such expectations,” said Shashank Khade, Director and Co-Founder, Entrust Family Office Investment Advisors.
Here are six common mistakes that investors should avoid when markets trade at all-time levels.
Exiting all positions
Sometimes retail investors try to sell all their profitable positions when they hear that markets have hit all-time highs. They reason that this selling action is in anticipation of a massive bout of correction lurking right round the corner. While a correction is always somewhere, exiting all positions is a big mistake.
Anil Rego, CEO & Founder of Right Horizons Financial Services, said, “Stock market benchmarks have been hitting new highs for many months now, and this is because of huge gush of new-found liquidity. The low deposit rates are a major reason why regular inflows keep coming into the market. There is no reason to believe that deposit rates will go back up, and hence stock markets will continue to receive liquidity support in the meantime.”
In each market rally, there will be certain sectors or stocks that will lead from the front. When markets hit new highs, some retail investors start looking for new ideas among the garbage heap! This is a horrible practice.
“If a stock is languishing near all-time lows when markets are trading at highs, this does show that there is something terribly wrong with that stock,” said Rego.
In an effort to make up for lost time, many investors make this mistake. This mostly happens when they have sat out for almost all the rallies. Many investors, who were earlier not convinced of market strength, miss superb stock rallies. When they realise it’s too late, they want to jump in. They try to bet huge sums of money in an all-out attack to salvage some gains. Putting your whole corpus at one go is a recipe for disaster. Always invest according to your goals. The performance of an asset class, in this case equities, should not decide your investment pattern.
“The sense of ‘left out’ feeling continues to remain high amongst aspiring, under-invested investors in an all-time high market. Such under-invested investors start to get uneasy and start to invest randomly. Such times the investors need to carefully examine valuations and understand feasibility of projected growth. There is no need of compromising on quality of companies or businesses to be invested in. Sticking to quality becomes even more critical,” Khade said.
Avoid becoming a cash pile king
There have been periods in the equity markets when shares have rallied almost in an instilling manner. Many investors argue that if benchmark indices are hitting new highs, now is the time to wait with your money bag.
So, they start waiting, thereby missing attractive opportunities, and actually lose money because idle cash doesn’t pay much return. This trend shows a conservative attitude. Markets may be on a high or low, that shouldn’t stop you from investing in opportunities.
Don’t look at absolute numbers
Stock market benchmarks and even individual shares display absolute numbers like price. Most investors make their decision by looking at stock price or rate.
Without the use of analytical tools, a mathematical number may indicate something totally wrong to you. Benchmark BSE Sensex trading at 32,000 may not be cheaper than one trading at 15,000.
However, absolutely numbers can make you believe so. This is why, it is important to see value in what you buy. As Warren Buffett said, price is what you pay but value is what you get. Try to look at valuation and then assess stuff. Don’t look at only one metric of valuation to decide. A price-to-earnings (P/E) multiple metric may not be the right one to decide the valuation of a capital intensive sector like power or telecom. Absolute numbers often misguide absolutely!
Check promoters holding
If you are buying a stock where promoters are continuously reducing stake. There must be something fishy and you should stay cautious on the company.
Khade said, “If promoters do not see value in their companies and continue to reduce their ownership, investors need to be wary of such companies since insiders know the business better than investors.”