The Real Side of a Stock Market Rally
As 2021 starts off brimming with optimism about recovery from the Coronavirus, hopes of life getting back on track begin to resurface. Stock Markets worldwide are showing exuberance that can easily excite anyone and make them feel that there's nothing better in the world than the world of stock market investing. Nifty (NSE:India) is at all time highs of 14500, Sensex (BSE:India) is touching 50k and S&P 500 ( a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States) is touching 3800.
However, as 2020 leaves strange memories of a year none of us would consciously like to revisit, it also leaves thoughts about a foregone era that we all must definitely learn from. One of the biggest lessons is to be prepared for uncertainties because the market has nobody's back.
While stock market rallies are one of the best thing the equities markets offer, it is also important to understand the risks that they come with. As a platform focussed on education about the financial markets, its important to also highlight the fact that risk diversification is also key to financial investments. All rallies need to be handled with caution and restraint. Do not overindulge if you are in a losing position hoping the tide will turn on the basis of “hunches”. And if you are doing well in some positions, always circle back to check whether those investments are actually giving the returns you anticipated and continue to have their fundamentals in place. An often occurring circumstance when markets rally is the emergence of new fund offers as well as deals that look promising beyond reality. As mundane as it may seem, due diligence should never be overlooked when investing in new products, equity, bonds, mutual funds, gold backed securities whatever they may be. What a lot of novice investors feel is the fear of missing out when markets are riding tides but what is also important to understand is time and again, Timing of entry in the markets is very very critical to financial successes. Wait for corrections in the current rally to give you promising entry points if you missed the rally thus far. With patience and the right mindset, investing will become your treasured asset. A few golden thumb rules to stick to time and again include:
1. Lay out your financial goals
2. Diversify your risks by investing across asset classes
3. Evaluate returns with reference to the risk you’re taking in any asset
4. Understand the information that is laid out in any scheme related document
5. Assess the risks as mentioned on the mutual fund riskometer ( which now has 6 different classes)
6. Learn about the instrument before you invest.
Off late there has been a steadfold increase in fintech apps, products, advisory services and new offers all because of the increase in retail investors interest in such products in current times. Close to 60 lakh new demat accounts have been opened in the last few months alone and the same will definitely be targeted by people either promising to make money for you or assuring you tips. As tempting as it may feel, it is important that retail investors refrain from such practices otherwise you’re putting your hard-earned money at risk and in the hands of those who’re looking for quick bucks and naïve investors.
The need to be financially literate is abundantly crucial in today’s times, and needs to be embraced now more than ever. Be a financially literate investor, understand where your money is parked before you jump onto the bandwagon hoping that this irrational exuberance is going to double or quadruple your hard earned money. Subscribe to The Fin Lit Project and join our community of finance learners to make better and informed financial decisions by Embracing Financial Literacy!