Most investors end up buying heavily at the tops and selling out altogether when the market hits the bottom. Isn’t it ironical considering that this is exactly opposite to what we normally do at the time of bargain sale or even while considering any purchase or sale transaction. I subscribe to the key elements of very relevant approach followed by equity market veterans during the periods of high market volatility as shared by Jaikishan Parmar of Angel Broking.
1. Take a SIP approach to investing rather than trying to time the market. Following this approach, a smart investor will automatically amass more shares when the market is low & get most value when the market eventually picks pace. On your tally, you’d see that you’ve done better than a lump-sum approach.
2. Adopt a rule-based allocation to equity. P/E is considered a basic proxy for equity valuations. Structure your equity in such a way that your exposure to equities goes down to say 30% by the time P/E is 25 and further down to 15% by the time P/E is 28. This will ensure that profits are booked at regular intervals, you have liquidity available when better opportunities become available at lower levels.
3. Employ formal research tools (self or professional) and hold on to winners as long as you can. A fundamentally strong stock is able to withstand the test of volatile periods due to strength of their business models, management. While they go through down cycles, temporary problems but they hold their ground pretty well. Identifying such stocks is critical to be successful in long run. Use sharp correction times to accumulate more of these stocks.
4. Exit losers fast without committing cardinal sin of averaging. Holding onto losers in the hope that they’ll bounce back & worse still, averaging loss making positions are two big mistakes an equity investor can commit. It is important to change your decision and exit if the outlook indicates so.
In nutshell, you should be a long-term investor by design and not by default. «GM»
Source Credit: Based on article by J. Parmar (Sr Equity Research Analyst at Angel Broking) as published on Money Control dtd July 25, 2018