When is the right time to invest in share market?

Upon finding the markets correcting sharply, as has been happening in the last two months, it would be normal of investors to worry and question whether they should stay invested or exit en masse. Then there are also the more adventurous investors who wonder if any correction is a time to jump in for some bottom fishing.

The truth probably lies somewhere in between.

Your trading account or your trading app is not a ticket to punt on the markets, but is meant to facilitate a long-term approach to investing. Now back to your key questions; is this the right time to invest in share markets? The answer would be “it depends”.

Do Not Get Obsessed by the Nifty or the Sensex

These are indices or benchmarks and that is how you should treat them. A 13% correction in the Sensex means nothing to you. If your portfolio consists of IT stocks, you have actually been enjoying positive returns. However, if you were long on mid-caps and NBFCs, most likely your losses are much deeper right now.

Nonetheless, your decision to invest should depend purely on the merits and demerits of the individual stocks irrespective of the current position of the Nifty or the Sensex. Different stocks offer varying degrees of risk and return and each is best suited for a different investing timeframe. Once you take a granular approach, things become a lot clearer.

It Depends on How Long-Term is Your Long-Term!

Long-term investing is one of the most commonly used and also one of the most misunderstood words in investment parlance today. Contrary to the general belief these days, when we talk of long-term investing, we are not talking about one or two years. When you talk about long-term investing, you cannot look at anything less than seven-eight years. Moreover, most investment gurus do not consider anything less than 15-20 years as long-term. That is the kind of timeframe in which equities really generate wealth for you.

The longer you have to amass your cash, the greater risk you can accept, and consequently, you'll have more time to wait out periods of bad returns. Let us put it this way: even if you need the money within the next five years, you may want to avoid individual stocks and probably look at diversified equity funds.

When it comes to long-term investing, time spent in the market matters a lot more than timing the market!

In Any Correction or Rally, Some Stocks Are Meant to be Sold

The word long-term investing comes with a very important qualification and that is ‘earnings visibility’.

There are some stocks that offer you a clear opportunity to exit. Don’t get obsessed with your long-term theory here. Sample this: the first case to sell is when the business fundamentals have perceptibly changed. For example, NBFCs may be under financing strain after the IL&FS issue. Brick-and-mortar retailing may be under pressure due to the onslaught of e-tailers. These are fundamental changes and call for a change in the way you value these companies.

Another reason to seriously look at an exit is when stocks get overvalued. Has the stock market brought the company's shares to unsupportable heights? Is the stock looking vulnerable and could likely crash on the slightest bad news? Above all, be very cautious about corporate governance issues like disclosure, transparency, group transactions, auditor objections, etc. These are the kind of red flags wherein you need to sell the stock, irrespective of the state of the market.

Shield Yourself From the Noise and the Cacophony

Markets can be chaotic and the never-ending barrage of media opinions can make markets appear even more frenzied. However, always remember that the media tends to focus entirely on the index and a handful of weighty stocks, assuming that it reflects the entire market. Also, there is too much focus on chart levels, supports, and resistances of any stock. The stock does not understand technicals and that is something you need to be wary of. If you are getting a quality stock at the right price with a reasonable margin of safety and if you are willing to hold it for the long haul, you should go ahead and invest. After all, you are investing in the company’s business and not in the price vagaries of the stock.

Ensure that the Stock Makes Sense in Your Portfolio

This is the last and perhaps the most important test. Whatever stock you buy must fit into your risk-return matrix. There is no point for a conservative investor with limited risk capacity loading high beta stocks into the portfolio. That is a clear mismatch.

Look at the sectoral sync among your stocks. If you are already heavy on a particular sector or theme, don’t just keep loading more stocks from the industry even if all the other conditions are met. That is the key!