Retail investors eager to invest in equities are facing an age-old dilemma. With stock markets at record high i.e. Sensex at over 31,000 and Nifty near 9,700, many feel they may be timing the market wrong because a fall may be just around the corner.
However, history has shown otherwise. Nobody knows when markets will fall next, and staying invested gives you a far better chance of becoming wealthy. At least, it is better than waiting for that elusive bottom.
Here is a 3-step process that will help you start investments, even if markets are at their so-called peak.
1. The longer your time horizon, losses vanish
Unlike many traders or short-term investors looking to make a quick buck, retail investors today are of a different kind. They know that they are not traders.
Hence, they invest for the long-term i.e. 5 to 10 years. If you have a longer time-horizon, the level of the index will have very little bearing. If you choose to directly invest in fundamentally researched stocks, or indirectly through mutual funds and unit-linked plans, the possibility of losses falls sharply beyond a 7-year holding period.
This means your chance of recording a loss becomes infinitesimally low when your investments spends a large amount of time in the stock market. Of course, this doesn’t mean you will get away by putting your money in get-rich-quick schemes!
2. Start with some, and then hike exposure
When kids are afraid of jumping into a swimming pool, we dip their toes to acclimatise them with water. Swimming comes easier once there is some confidence.
This is the same approach you should take if you are feeling hesitant. Stocks are the only asset that can beat inflation and gives solid risk-adjusted returns. However, your vision may be clouded because of Sensex@31K or Nifty@10k.
The simple thing to do is to take a small exposure, and then increase it. There are some financial products that have 20-30 percent exposure to stocks and then rest in fixed income.
If you are investing in stocks directly, allocate 5-10 percent of your money in blue-chip shares that preferably pay a perky dividend.
You will soon gain confidence, and invest more. If you are convinced about the fundamentals of a product or a stock, buy more when prices dip.
3. Markets hit highs, and then hit new highs
When the Sensex hit 6,000 level in 2000, many people doubted if markets were strong enough. By 2005, it was near 9,500. In 2006, it hit 14,000 mark before ending below.
Then came a period of lull, underlined by the fear mongering around the global financial crisis. The Sensex fell to multi-year lows, before slowing creeping up. By 2013, the Sensex was near 21,000 and today in 2017, Sensex @32000 is just round the corner.
As corporate earnings, investment inflows and economic reforms happen, markets have taken out new highs regularly.
So, the belief that this time market is at its ‘peak’ is probably a fear. Just like Virat Kohli is challenging Sachin Tendulkar’s batting records, stock markets also challenge their old records and make new ones.
Imagine the plight of an investor who took out his money from equities when Sensex was at 2000! In 17 years, his money would have grown 5 times or even more. Do you want to be the investor who missed out?
Summary: Stop looking at index levels before you invest. Instead, your investment goals should dictate the nature and quantum of your investment.
Disclaimer: The author is CEO & Founder of Right Horizons Financial Services. The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.