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.