The trifecta of low volatility in the stock markets, high returns in the past 2-3 years and unattractive alternatives (FD, real estate, gold) have resulted in record inflows in the stock markets, especially via Mutual Funds.
In fact the total money inflow in Equity Mutual Funds in 2017 is more than that of the entire 2003-2008 period!
These strong inflows have pushed the stock markets to new all-time highs.
Mid cap and small cap indices are currently sporting P/E valuations of more than 50 and 70 respectively which would generally be considered caution-worthy.
How long will the rally last?
No one knows.
The four most dangerous words in investing are "This time it's different." - Sir John Templeton
It is always different and yet it is the same. Markets move in cycles and predicting turning points are impossible.
The stock market could crash 50% in 2018 or keep going higher. No one can tell.
However, there are a few things that I am certain of:
a) The stock market will go down at some point in future - could be this year itself or after 5 years. It is a question of when and not if.
b) Investors who invest according to their risk profile (even if it is low) will make more money in the long run than investors who don't.
Investors taking on more risk (e.g. investing in high risk allocations but actually having low risk profiles) will panic when the markets turn south and will exit at a loss, usually at or near the bottom. They will also not get back in until it is too late and the market is already hot again.
This is what happened in 2008 and this is what will happen again when the next major downturn occurs.
"Those who fail to learn from history are condemned to repeat it." - Winston Churchill
And unfortunately a bull market spawns many such investors who get swayed by the siren song of recent returns and start investing in higher equity allocations giving in to their FOMO.
Even in Goalwise, despite all exhortations, more than 60% of Wealth goals are being invested under a high risk profile setting while less than 20% of those investors actually have a high risk profile!
80% of investors investing under a high risk allocation actually have a moderate or low risk profile.
It is a tragedy waiting to happen.
What should you do?
Invest strictly according to your true risk profile and always be prepared for the worst.
If you have gotten away with taking on higher risk so far, count your blessings and dial it down.
Follow the steps mentioned below to align your investments to your actual risk profile.
Take the risk profile questionnaire if you have not already. Be realistic and honest in your answers. When in doubt select the more conservative option.
If you have been investing in a higher risk profile, change it in your goal plan to the one obtained from the questionnaire and save the goal plan.
For first time investors, no matter what you think your risk profile is, stick to either a low or moderate risk profile.
You have not experienced a downturn yet. Once you have been through a complete cycle, you will have a better assessment of your own risk profile. Before that you are just kidding yourself if you think you have a high risk profile.
Rebalance your SIPs and portfolio accordingly as per your new goal plan settings.
Need help doing this? Get in touch with your financial advisor or ping us on chat.