Investing in stocks: here’s everything you need to know
Stocks as an asset class are known for their superior wealth creation potential over the past decades. Nifty has grown by around 50X since India embarked on Liberalization, Privatization and Globalization (LPG) reforms in 1991. The journey, however, has not been linear and has seen several episodes of extreme volatility.
For example, February-March 2020 saw a quick and sharp correction of around 30% and the returns since then have been just as extraordinary. Subsequently, the current rally also prompted many retail investors to enter the stock markets and retail investors adopted the DIY strategy of investing in stocks. This is illustrated by the fact that 1.5 crore of new Demat accounts have been opened in the last 18 months. While it is quite encouraging to see Indian youth plunge into the equity market, the fear is that new age investors have only seen the markets on an uptrend and have not seen much of their portfolio decline. until now.
There is an inherent risk that investors will get carried away by the initial bullish move, but the real litmus test would be when the markets correct themselves and then whether those investors will be emotionally able to see their portfolios in loss without panicking and making mistakes. investment decisions.
There are some things that don’t change over time and from a stock market perspective, greed and fear are two of those emotions. History is replete with examples where greed and fear hampered the ability of investors to make rational decisions (and indeed repented later). Invest when everyone is scared and asset classes are available at reasonably good valuations. Markets never give returns in a linear fashion. No matter how strong the market / company is, its performance would always increase in a non-linear fashion.
After the resounding movement of the last 18 months, the most relevant question from an investor’s point of view would be: how to position oneself in the historical market environment? Our view is that the long-term outlook for the markets is quite optimistic. Government policies are conducive to higher growth. The 2020 budget was a fundamental shift in the government’s attitude, as fiscal conservatism paved the way for CAPEX-led growth. Global monetary policy is also likely to change slowly but would remain constructive for an extended period, which is also good for growth. While current valuations are no longer convincing, the market is taking comfort from improving profitability, rising ROE, abundant liquidity and heavily deleveraged balance sheets.
However, as we continue to rise, investors should be aware of the inherent behavior of the markets, which is Greed Vs Fear. Currently, fear is mostly absent in the environment. Rebalancing the portfolio is one of the proven ways to deal with this conflict and avoid panic in the event of a sharp decline or correction. We urge investors to continue to rebalance their portfolios frequently based on their asset allocation needs and risk profile for a better investment experience. Discipline is the most important factor that determines the long term success of an investor.
Rather than constantly trying to find the new theme or new trends in which to invest, the investor should take a portfolio approach, in which the asset allocation call is the most imperative call of all. retail investor should take. While stocks are indeed an essential part of the portfolio for wealth building, investors should also be aware of other investment vehicles in order to build a diversified portfolio and generate stable and consistent returns. If the investor does not have the skills to select stocks, he can participate in stocks through various alternative investment vehicles such as ULIP, mutual funds, etc. This would leave the heavy task of choosing new themes or trends for professional money. fund managers / managers.
It should be borne in mind that volatility, sharp rises and corrections are an integral part of the markets and are here to stay. But staying the course and maintaining investment discipline is what makes someone a successful investor. If you are investing for the next five to ten years, you need to focus on the opportunity and how to seize it. You must continue to invest and rebalance your portfolio according to the objectives.
(By Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance)