How to invest when stock markets fly high

By: |
March 9, 2021 4:52 PM

Investors investing for the first time into an apparently peaked market must calibrate their entry rather systematically. At any given point in time, there are only two directions in which the broader capital market can head towards – up or down. The situation remains the same even at apparent peaks.

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The golden rule for successful long-term investing is to not worry about timing the market but instead focus on asset allocation, disciplined investing and focus on financial goals. However, it is only natural for investors to worry about entering at unprecedented levels – the levels at which anxiety takes over to be the primary emotion.

Investing in equities at these levels can be likened to stepping into the hot springs of Sikkim. Scenic beauty all around and watching people relaxing in steamy hot springs is enticing for most. But often, the first-time visitor is wary about entering the springs simply because of the intimidating steam. It requires the visitor to take a few calibrated steps into the spring for her to appreciate the heat and benefit from the rejuvenating effects.

Like the calibrated entry into a hot spring, investors investing for the first time into an apparently peaked market must calibrate their entry rather systematically. At any given point in time, there are only two directions in which the broader capital market can head towards – up or down. The situation remains the same even at apparent peaks.

If one were to presume that the apparent peak turns out to be an actual peak in the near term, it means that subsequent levels are going to be lower than the previous. Obviously, presuming a reversal point would be foolhardy. In such a case, some basic arithmetic would point out, initiating a monthly SIP or a Systematic Transfer Plan at the apparent peak with subsequent investments going in at lower levels will result in a lower average cost and consequently higher profitability as the market progresses in the longer term.

Case two, if the apparent peak does not turn out to be the actual peak and markets continue to move upwards. This is reason enough to start accumulating units at current levels.

As you would have noticed, both scenarios that may develop post a market peak create a strong case for systematic, periodic deployment of capital. In fact, both scenarios may be iterative with a strong case for cost averaging at low levels.

The below illustration reflects the arithmetic elaborated above. Obviously, this is not indicative of what the future may hold but is representative of the logic supporting wealth creation by deploying capital periodically irrespective of the point in the cycle. Apparent peaks included.

A sharp eye would notice that the current ‘peak’ is described as an ‘apparent’ peak; now you know it was described as such for good reason. There is no way one could identify a peak with absolute certainty because doing so would mean having the ability to predict the future. Unless we are in a Hollywood flick and there is a gipsy-lady with a crystal ball, the ability to predict the future is beyond human abilities and it is best we do not attempt to do so. Of course, we can all synthesise information and develop insights that will help prepare for most scenarios that may develop in future.

In the end, the way to successfully invest at apparent peaks is more about discipline, systematic deployment and sound planning.

by Nirav Karkera, Head of Research, Fisdom (a mutual fund investment app)

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