Business

Why selling now, buying later might not be the right strategy in this market

The correction in the domestic stock market is still the main concern of investors. Benchmark indexes BSE Sensex and Nifty fell more than 10% in the first half of 2022.

The pain is even more acute for the broader markets, where the mid-cap index is down more than 13%, while the small-cap index is down 17%. Both indexes are down about 20% from their 52-week highs, suggesting they are in a bear market.

For context, the NASDAQ has been in bear market territory after falling more than 20% over the past six months, which is plaguing investors, especially as recession fears loom .

Investors who are wondering if the market will bottom out should be aware that such predictions are difficult to make. Having said that, it is likely that the market will fall further before it gets better.

Overall, the Indian stock market remains expensive despite the higher growth India is seeing compared to other emerging markets. Countries around the world are currently targeting inflation by raising interest rates to combat inflationary pressures.

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Take the United States for example.

Until about six months ago, the world was debating whether inflation in the US was “transient” or “structural”. Then we witnessed what no one could have imagined – the Russo-Ukrainian war, which pushed energy prices into a different relationship. This goes against the backdrop of a very strong increase in global metal prices over the past year.

It’s clear that the inflation monster is here to haunt the world, which could trigger central banks around the globe to raise interest rates. The US Federal Reserve is also expected to do the same and the dollar is currently at a 20-year high as more money is pumped into the greenback in anticipation of this.

Brazil and Australia have both raised rates, and Norway’s central bank has said it intends to raise rates next month.

So when the market wobbles with rising interest rates, should investors sell now and buy back later?

Absolutely not! That would be a very bad decision for your personal investments. The decision to sell now and buy later comes from the illusion many investors have about their ability to time the market correctly.

Of all the major crashes we’ve seen in the past, many investors have heeded this call to sell and buy back when the market bottomed, only to regret it later. did not get the order in time.

It’s fair for the stock market to drop after a rally. The market tends to be overgrown for both sides. Up until about a year ago, everyone had a gala in the stock market and everything investors touched turned to gold.

That got more investors involved and the market went up even more. That has become a virtuous cycle that drives the market’s recovery. This process requires only one trigger point to self-regulate. The market overextended itself during last year’s rally and this correction is only dissolving that.

Where should investors then put their money?
Long term investors should be on the right track and follow an asset allocation approach to invest in multiple assets like stocks, debt, gold, REITs, etc. In fact, the current correction is good news. for genuine long-term investors.

The only major obstacle to investing in good companies is that they are never available at a fair valuation under normal market conditions.

Such geopolitical or macroeconomic reasons for cross-country index-based selling make your portfolio ugly. That’s when weaker investors move out of the game.

As a long-term investor, I’m specifically looking for opportunities like this to optimally add increased cash/debt to businesses without worrying about how the indexes will perform. in the next six months to a year.

Remember, good businesses provide a certain amount of value to their customers while increasing their incremental cash flow above the risk-free rate of return (for the sake of simplicity, think of this as the rate of return). FD) consistently, every year.

As the risk-free rate increases (as it does now), they need to work harder to maintain their growth rate. Larger, organized, professionally run businesses can navigate many times better than smaller, unorganized businesses.

(Vishal Vij is the Founder & Managing Partner, Nestegg Wealth. The views expressed are personal.)

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