Lessons from stock market rally for retail investors

The markets are on a fire once again. Supported by positive cues from domestic as well as international economic indicators, Sensex and Nifty have shown strong upward growth recently. The sense of euphoria in the market has now started resulting in predictions which range from market crossing the previous all time high to Nifty crossing 6900 by the year end. Probably we are entering a zone when irrational exuberance may overwhelm logic and valuation. But hang on!  This is not for the first time it is happening. The investors have been caught on wrong foot on many occasions in the past. It is time to be circumspect and take decisions rationally. Here are certain things that you need to note:

Do not forget law of demand: Go back to basics of Economics. When the price of a good falls, the demand for it rises and vice versa. In stock market, retail investors start thronging the market only when it starts going up drastically. This is a wrong approach. The stocks need to be bought when they are available cheap and not when the prices have firmed up.

Do not make lump sum investment: If the stock market has started looking like the most desired destination for your investment after it has gone up substantially, it is better to invest small amount of money and not make lump sum investment. Put small money through mutual funds and invest regularly.

Do not get influenced by stock tips: Now that the market has started going up, the next to follow will be rumors. This will include lots of information exchange on small cap stocks which till the other day nobody had even heard of. It is time to be careful about these stocks. Do not buy these stocks which mostly sold through word of mouth and retail investors find them stuck after certain time.

Do not create concentrated portfolio: Do not bank on selected or few stocks in which you have high conviction in terms of return generation potential. You should rather focus on a large cap stocks and keep a good number of stocks in portfolio. This will help overcome any challenges posed by southward movement of some stocks in your lot of stocks.

Do not follow market madly, you may become trader: Last but not the least, the market rally people start following market movement by movement even if there are not traders. This may create trading tendencies in an investor which may prove out to be fatal in the long run.