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Don't blame the stock markets

Dec 30, 2003

The buzz on the Dalal Street these days is whether the benchmark index, BSE Sensex, will touch 6,000 or not? Amidst this euphoria, we would like to step back and recommend that retail investors consider the few points we have listed in this article. In one of the recent investor's mela, we had a chance to meet a number of retail investors to market our retail research products. While interacting with them, the views expressed by these retail investors make an interesting observation. One caveat is that these are not hypothetical.

  • "This is a bull market and whichever stock I buy, I will make money for sure"

  • "I will give a list of stocks that will give you a guaranteed return in the next one month"

  • "Why don't you give me list of mid-cap stocks that I can buy for three months, because mid-caps are hot now-a-days?"

  • "Technology story is over now. Textiles and pharma will take the market to new levels"

  • "The stock markets are increasingly becoming volatile and cycles are short. If you recommend for long-term, it is not going to work".

Interesting for sure. But this is what one got to hear even when the stock market was spiraling upwards in the first quarter of 2000. As the stock markets are moving up consistently, one should invest more in equities and there are less chances of losing capital. But here are our views.

  • What retail investors do forget is the fact that equities, as an asset class, continue to remain a high-risk avenue, irrespective of whether it is a bull market or a bear market.

  • The allocation of surplus money between equities and other investment avenues like debt should not be different in a bull market and a bear market. That is, there is no great need to increase percentage of investment in equities just because the market are going up. The risk appetite of a person remains the same, depending upon the age bracket. This is one of the disciplines of investing in stock market. Not to go overboard and not to be overcautious on either side. But being consistent.

  • In a bull market, brokerage firms have a strong reason to make every stock look like a 'Buy' and there is a general tendency to upgrade target for the stock market. In year 2000, one research firm suggested that the Sensex would touch 9,000 by the end of that year. The markets at the time of this recommendation were at about 5,000 levels. We all know what transpired since then. If you hear similar kind of things in the current market conditions, don't be surprised and get carried over.

  • Having said that, we are not saying that do not invest in equities at all. What we recommend is that it is better to be safe than be sorry. Increasingly, retail investors should view equities as an attractive investment avenue on a relative basis. When compared to the return that one is likely to get over the long-term from the traditional investment avenues like PPF and NSC and even from the debt market, equities have a compelling reason. But it has to be based upon one's risk appetite. Remember, risk increases proportionately to return expected. Since the markets have run up significantly, what we suggest is to lower return expectations and invests for the long term. By long term, we mean a time horizon of three to five years.

More importantly, don't blame the stock market for your losses!


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