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I happened to be on Dalal Street on the day Sensex crossed the mark of 35,000 on 17th January. There was the crowd, there were cameramen, there were balloons, the environment was charged with jubilation and the celebrity was SENSEX!
Then, the news cried out loud this week "....the Sensex took just five trading sessions (January 17-23) to reach the historic 36,000-level from 35,000....". And, you may have been going slow with equity investments anticipating a downturn in the market due to the high valuation of PE. Currently, NIFTY PE is above 27.5. The PE has been in this zone less than 5% of the times in the history of the stock market.
It is no wonder that you will feel FOMO - "Fear Of Missing Out" - the market rally. I want to present to you some data to address this emotion. We all want to catch the maximum upside of the market but it is more important to protect the downside. See below for the 10-year history of the Indian market returns and a representative portfolio where a manager has underperformed the market during upside in all years except one. However, the manager has outperformed the market during downside in all the three years (meaning fallen less as compared to the market).
Aren't we surprised that the manager has still outperformed the market over 10 years?
The logic is simple, if your portfolio falls by 50% then it needs to go up by 100% to reach the same level again. Hence, the key is to protect the downside which in Mitraz parlance we call, RISK MANAGEMENT. Mitraz mission statement emphasises prudent RISK MANAGEMENT. We talk about it in every conversation with our clients. It is all about how we can soften the impact of market fall, if and when that happens.
So, do not get swayed by the FOMO emotion but rather build adequate risk mitigation in your portfolio. Adhering to asset allocation, disciplined investing, keeping balanced outlook and patience with the markets remain the key attributes of a SUCCESSFUL INVESTOR at all times!
The writer is the Managing Director of Mitraz Financial Services Pvt. Ltd and can be contacted at firstname.lastname@example.org