Some monks and saints have this uncanny ability of reading one’s mind. Unfortunately, mind itself is unstable and unreliable. Astrologers read the stars and predict the future. They get it right sometimes and wrong most of the time. Magicians perhaps have the best track record of doing the impossible until their trickery is exposed.
Many people believe that stock markets are predictable. They can put all monks, saints, magicians, soothsayers put together to shame with the confidence levels they have in their predictions at the time of making it. Everyone loves boasting about the stocks they own. Those who don’t own the stocks or missed out keep making dire predictions about monumental fall looming ahead. Fertile, imaginative, biased human minds most often mislead us to undue over optimism or over pessimism.
Is there an exact science or a mathematical tool or a model to accurately predict the behavior of markets? None whatsoever!! The rational vs emotional debate is most relevant here. Emotions coupled with biases overrides rational sentiments most of the time.
So, what’s the right time to enter or exit the markets? Should it matter to a long term investor the price at which price he is entering? What should be done when markets are burning hot or falling nine pins?
Much we may want to deny, entry and exit does matter to even a long term investor. Unfortunately, there is no way we can accurately time our entry and exit. Markets can fall or rise due to a variety of reasons such as rumors, emotions, fear and greed plays its part potently. It is best to average out the entry and exits. If possible, average out the entire investment journey.
The way to go about is to perhaps study historical data of markets. The past data can give some valuable insights on market valuations. You can invest systematically if markets are at an average or below average levels and redeem systematically if valuations are above historical average estimates. You can still go wrong. However regrets are for lesser this way round.
One golden rule is to never breach your asset allocation. In simple language ear mark a certain percentage out of your total net worth for stocks based on your risk taking ability. Be prepared to lose substantial portion of these funds in an adverse scenario.This limit should never be breached.
Drawing an analogy, in the epic Mahabharata, during a gambling session, pandav king Yudhishter lost everything he had, including his brothers and wife, as he breached this golden rule. In Ramayana, Sita crossed the Laxman Rekha and paid the price as demon king Ravan abducted her easily thereafter.
The bottom line is to draw a line and not erase it in exuberance or pessimism.
Patience is another critical ingredient in the entire mix. Having done all the hard work, wait for tide to turn. Avoid FOMO or fear of missing out. Trust the methodology and disregard the sinking feeling or the fear of missing out. Don’t get into unhealthy comparisons with others. Each one has his own method and destiny. What is good for others may not work for you!!
If you are unable to do the historical data study, design asset allocation based on your risk profile then do not hesitate to contact a SEBI registered financial adviser.
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