There are times when anyone who has read half a book on finance can tell you that stock prices are unreasonably high. Of course, it is possible that prices keep moving higher despite such assurance. For this reason, it is often a good approach to stay invested irrespective of stock prices and over time . . . . things will even out.
Sure. But do you necessarily have to be blind to everything?
If the view is that the markets are expensive and should fall, why not sell stocks and invest money in a liquid fund which earns 8-10% p.a. and comes with no lock-in?
Alternatively, you could build a small (or large) short position in your portfolio; something a lot of smart fund managers do. A short position can potentially cover portfolio losses in a falling market environment.
The other popular method of dealing with expensive markets is to build a long-short portfolio. It’s a tax effective method as it allows investors to ensure long term capital gains on their investment positions without selling stocks.
Should you try to build a long-short portfolio?
Long-short equity portfolio involves buying large cap stocks that are fundamentally sound and are expected to do well over a long-term horizon and at the same time selling mid – large cap stocks that are expected to decrease (rapidly) in value, particularly in a falling market environment.
Why not do the simple?
If however you are just not sure of the market and are not comfortable with complex portfolio management strategies, the easiest thing you can do is to buy a liquid fund and stay away from the market. Particularly when earnings are deteriorating, valuations are at 30% premium to their 10 year average and there is talk of rising interest rates in the west which means that liquidity (particularly FII money) could be sucked out.
Over the past few weeks I have been more than inactive with my comments and recommendations. I was away for a little over a month. I tweeted this while I was on my way to the airport.
It may seem almost unreal after what we have witnessed this week but since my above tweet Nifty has fallen over 300 points! (in 7 weeks)
The truth is that 7 weeks back everybody knew the markets were overvalued (and may be still are). Yet for a lot of investors it was important to do something in the market. Consider this, on Friday morning, just before the market opened, I was asked on TV show – “Give me 2 stocks that should do well based on the GST slabs (which were announced previous evening)”
I said, Colgate and ITC. As luck would have it, they both opened 6-7% higher. One of my subscribers took objection to the fact that he was not informed about these recommendations before they were made public. The truth is that I mentioned these stocks only because I was asked a pointed question. These are speculative commentaries. They should only be followed by those who believe in high risk investment strategies.
In the first 4 days of this week, if you were taking delivery of stocks, you would have had to be extremely unlucky to not have made money. I say this based on profits generated in all self traded accounts. The current level of interest in stocks seems to be at an all time high for 2016.
Something to think about: Where markets are right now – assuming that you can make 15% in stocks with whatever level of risk you take, is it really worthwhile? Would you not rather make an assured 8-10% return? OR does beating this rate by 5-7%, justify taking such risk?
Get in touch with me at firstname.lastname@example.org to discuss how best we can work together. I primarily work with investors who manage their own portfolios. I do not charge any commission for the same.