Nifty - the index for stock markets closed at 10,390 on Friday, 24 November less than 1% away from its all time high of 10490. Since the beginning of the year it has grown by 30%. In contrast bank FDs are giving at most 7% interest per annum !!
So is this the right time to invest in stock markets ?
Logic states that the answer is an absolute NO.
The stock market rally has been driven by liquidity (lots of money chasing stocks). The liquidity is because of multiple reasons, key being
A retired person lives off interest on savings. With interest rate down, s/he invested very small portion of savings in market. And boom it skyrocketed. So s/he moved a lot of their saving on stock market.
In many developed countries, central banks are pumping lot of money in economy (called Quantitative Easing). This has reduced interest rates in their countries. So to get better returns, lot of money is being routed to emerging economies like India
After seeing great returns, many individuals are moving their money to stock markets there by driving up liquidity (add to it lot of advertising by Mutual Funds, SIP providers)
With central banks reducing amount of money pumped (or removing it like in case of US) and retired persons having invested most of their savings in markets, liquidity could dry up soon.
The rally being irrational can be gauged from the fact that
- In last one year Bharti Airtel stock climbed 80% despite Reliance Jio launching it services at fraction of its costs. In process Bharti Airtel’s profits fell by 50+%
Also unlike India, many companies in US have given fantastic results.
So why getting out of market now may be the winning strategy
If we look at last two falls of stock markets in 2000-01 and 2008, the prices fell between 40% to 60% from the peak.
Falls are extremely difficult to predict. We have already had a rally for 9 years - the probability of it continuing, falls with each passing year !!
So if you invest 100 rupee today in stock market today, few of the scenarios possible are
- In one year your money grows to 115 and then falls to 69 (assuming 40% fall)
- In two years your money grows to 130 and then falls to 78 (assuming 40% fall)
- Contrast that with putting that money in bank and it earning interest. The amount will be greater than 100 and when markets fall you can jump in and buy stocks at lower costs. Historically markets have crashed and rallied alternately !!
So logic says - sell all your stock market investments and wait patiently for the mighty fall to happen. In essence follow the philosophy of Warren Buffet “Be greedy when every one is fearful and be fearful when every one is greedy”
DISCLAIMER : the above article is just a logical argument from layman’s point of view and not a meant to be an investment advice to the reader. The reader should consult a professional investment advisor before taking any investment decision.