To say the past year proved to be a disappointment for retail investors would be an understatement. Nevertheless, many were drawn into the markets by the 2021 excitement driven by low-interest rates: Stocks surged, businesses grew, and markets popped. And then 2022 landed with a crash.
Global benchmark indices indicate that 2022 was a lackluster year, with the SP500 index falling 15 percent year-to-date. In the UK, the FTSE100 index had a tough time during the year and fell 5 percent year-to-date (YTD), while the German DAX30 index fell 13.91 percent YTD. Moreover, many blue chip stocks also saw their stock prices plummet, a sign that most global stocks lost the gains of 2021.
After witnessing bright signs of economic recovery in 2021, most investors believed 2022 would follow in the same vein. But the geopolitical issues, rising inflation, and commodity prices put paid to dreams of 200 percent gains. Yet, though such times are challenging, they are also when you can learn something from them.
Here are some tips to avoid these mistakes this year:
Bear Markets Are Unavoidable
After a steep stock market crash in early 2020 during the pandemic, the stock market went on a great bull run in a short period. Nifty50, used as a gauge for the stock market's performance, had more than doubled by early November 2021 from its March 2020 lows. For perspective, before the crash beginning in mid-February 2020, it had taken the Nifty 50 over 18 years to reach the 7000 milestone and over 6.8 years for the following 8000 points.
Turmoil Brings Opportunities
The sooner you accept that bear markets are here to stay, the faster you can find the opportunities in turmoil and use them to your advantage. Specifically, down-market periods can be a chance to pick great stocks at discounted rates lowering your average costs eventually. CMP is the average price you pay per share of a particular stock.
For example, if you bought 20 shares of a stock at Rs. 200 per share, your average CMP would be Rs 200. If you purchased 20 more shares at Rs. 100 each, your average CMP would be Rs 150. Finally, if the price increased to Rs. 300 and you bought 20 more, your average CMP would be at Rs 200 again.
A falling market can be an opportune time to lower your average costs, especially if you've been buying shares in a bull market before. Reducing your average costs is ideal as it will eventually decide your gains or losses when you sell shares later. Two investors can sell the same number of shares at the same price, but the one with the lower average costs will earn more profits.
Predicting Stock price movements is impossible
One of the best things you can do is be consistent through the good, the bad, and the ugly in the stock market. Doing so may be easy when it is the Bull market, and your investments are soaring. But, consistency is more problematic when the markets turn volatile or steeply fall. After all, logic says holding off investing till prices reach their bottom makes sense.
Yes, it does make perfect sense, but in theory only. The issue is that the stock market does not behave logically, and trying to predict when stocks you like will bottom out is just that: an estimate. Nobody can forecast how the stock market will move in the short-and-long term. You can use metrics and other factors to make an educated deduction, but you can't know for sure.
Trying to time the market is a useless game and challenging to do consistently in the long term. Instead, you can save yourself from trouble using the rupee-cost averaging. Rupee-cost averaging means you invest a fixed amount (SIP) at set intervals regardless of the stock prices. This method lets you control your urge to time the market as the investment schedule is fixed.
You may invest when prices are high or low. The critical factor is that you eliminate emotions from investment decisions and believe the average costs will even out in time.
Inflation is cyclical - and so are interest rates.
The Russia-Ukraine war may have triggered the rise in inflation. However, experts expected inflation to rise. Like the downturn in a business, falling inflation levels are always followed by rising inflation. So, creating a portfolio that can either ride out or handle inflation is an exercise you must do periodically.
Considering the same logic, the aggressive stance central banks have taken means the inflation will moderate, and the interest rates will fall too. It's a case of when and not if.
Moreover, other countries are over-levered, but the Indian economy is not. Businesses and the government have used the last two years to make structural and tactical changes giving India an edge. As a result, India is poised to become the third-largest economy in the world.
People will adjust, change, and develop
People are hardwired to adjust to circumstances, change, and grow from adversity. For instance, the pandemic could have caused death by billions and destroyed humanity. Instead, we developed vaccines within a year for the market via innovative technology. Had we given up, the scenario today would have been entirely different. Likewise, another crisis will loom around the corner, like climate change, the next virus wave, global wars, terrorist attacks, or something else. All you must remember is –This, too, shall pass.
Unpredictability is the name of the game.
The short-term markets will always move unpredictably. And this year has not been as volatile as 2020 was. NIFTY is up 7% for the year but fell 15% at one point. The broader markets were worse. So, your journey in the equity market may be smoother than an FD, but to make gains, you must live with a bit of pain in the short term. Even if NIFTY was down in the first six months of 2022, not investing in the markets was a wrong bet. The idea of managing volatility is to spread your risks across assets, commodities, countries, and currencies.
This is 2023, and the New Year calls for a new list of resolutions, with no surprise! So, have you added Financial Freedom or investing wisely to your resolutions list yet?
Personal finance expert Dave Ramsey said best: “You must gain control over your money.
Or, the lack of it will forever control you!"
Investing is about meeting your short-and-long-term financial goals like buying a new vehicle, owning a bigger house, saving for education, your startup, or retirement – we can go on and on as the list is never-ending. However, achieving these goals depends on how much you earn and spend, your lifestyle, and how you can fulfill these needs within your financial boundaries.
Becoming financially literate is vital to make the most of income and savings and achieving Financial Freedom in a true sense.
The author, Sanjeev Anand, is Wholetime Director and Head of Business Excellence at Research & Ranking