Stock market prices are at a record high. They are scaling new peaks every week, led by a flush of money from foreigners and local investors. Many are rewriting definitions of what is cheap or expensive in the market. Things are getting heady.
“Making money is all about risk, optimism and courage. Keeping money is an entirely different psychological ball game,” says Morgan Housel in the book Psychology of Money. When you are out to make money, you know there would be risks and pitfalls. You are prepared to take a knock or two. A common element is the poor understanding of market, economic and business cycles. You may think that it may require in-depth knowledge and a course in finance. However, there are some things you cannot miss out on.
If you are a professional or a small business, you will know when the company is easy and when it is not so easy. There could be sector-specific factors for the business to be slow. However, if you see everyone struggling to shore up business, you know it is a business ‘down’ cycle. The natural reaction to that is to ride through it and wait for the right time. It is risky, but you do manage to ride through it.
As businesses await a better time, investors try to anticipate their fortunes. They bring in the money early amidst the hope that profits and revenue of companies that they own would grow at some stage when life goes back to normal. The inherent optimism drives share prices up. Investors back businesses through private equity or debt. In the secondary market, share prices rally like they are doing now.
All of that requires courage to hang in there. Besides the knowledge bit, you need the stomach to act on it. After all, it is your hard-earned money. Losses can be painful. This column is not about telling you when to buy or sell your investments. A lot goes into arriving at such a decision. That includes information that you can easily access and information that requires a more profound understanding of financial markets. You will read about things that you can easily access here. The rest we would leave to analysts, financial advisors and other professionals.
If you have been investing steadily directly or through mutual funds over the years, you may want to continue doing that if you do not need that money now. However, if you need the money now or over the next couple of years, you may want to sell. Yes, share prices may rally after you sell. But then, you need to focus on your financial goals and get out.
If your goal was to double your money in five years and your investments have helped you achieve that, you must sell. The present and the future value of stocks in the financial markets should have no meaning to you as you have reached your goal. You could have had your dream car in mind or a down payment for a home mortgage. You must sell and book profits.
For those trying to make money amidst the euphoria in the stock market quickly, things could be tricky. Share prices tumble pretty quickly. However, they gain the lost ground steadily. That is a pattern in history after every stock market fall. Famous author Mark Twain once said, “History may not repeat itself. But it rhymes”. After every dramatic rally in the stock market, there is a period of lull. A fall and then a slow recovery. For those new to the world of investing, you need to just go back to March 2020. The sharp drop in the benchmark indices took nearly a year to recover.
Your ability to take any risk is primarily a function of your future income. You can continue taking the risk by using investment strategies based on machine learning or artificial intelligence or by an expert advisor. However, if you are new to the world of investing, it may be a good idea to err on the side of caution when share prices are at a record high.
When you have achieved your goal - Sell
If your goal was to double your money in five years and your investments have helped you achieve that, you must sell.
(The author is editor-in-chief at www.moneyminute.in)