Ever since the market bottom of March 23rd 2020, the equity benchmark index Nifty 50 has relentlessly kept on climbing. At roughly 15,800 plus level now (22 Jun 2021), it is at an all-time peak.
It is said that looking at the absolute level of an index is hardly an accurate indicator of whether the market is expensive and potentially close to a peak.
If we shift our gaze a little towards simple valuations, even then Nifty 50 at a price earnings (PE) value of 21.3 times its FY 22 earnings looks relatively expensive. This valuation is roughly 20% higher than its 10-year average PE of 17.5 times.
The valuation itself may be temporarily expensive. Given the economic cycle we are in and as lockdowns get withdrawn, the vaccination drive gets underway, and economic activity starts to get back to normal, things are likely to get better.
The expectation is that corporate earnings will grow incrementally, and the PE valuation will start to look cheaper from next financial year.
The justification notwithstanding, the market benchmark is at an all-time high and currently it’s forward PE is looking very expensive.
What if the expectation on earnings improvement does not come through? It is a confusing time for investors. There is no ‘best’ way to invest, but it may help you to keep some basics in mind.
First thing to do – Don’t stop investing
In January 2020, a couple of months before the sharp crash in the equity market, index value was at it’s all time high. Back then too investors were in a similar dilemma of whether to go all out or wait for a correction.
The usual reasons for a correction were given. However, when the correction finally came it was for a reason that no one envisaged. It wasn’t a threat till just a few weeks before. Not only that, the fall was sharp and short lived; many who were waiting on the sidelines probably didn’t get a chance to re-enter at low prices.
The lesson – It’s hard to foresee accurately when market prices will fall, how sharply and for how long. The best option you have is to go on investing regularly rather than trying to predict a fall. The market level today is 30% above the peak in January 2020.
Second thing to do – Don’t try to catch the bottom
If you are waiting on the sidelines, the expectation is that you will be able to start investing when the market falls from its peak.
Last year the equity market benchmark Nifty 50 fell more than 5000 points or 40% in a matter of a month. By the time it was at its lowest point, many were afraid that it can go on falling another 10%-20% at least.
Along with that, a brewing global pandemic with chaos and loss of life, added to the uncertainty of what lay ahead. It was unlikely that one would jump into investing in huge amounts even at the lowest point. As at that stage you could only envision worse outcomes and not higher market levels.
Had you been investing regularly; you would have invested some amount at lower levels too. If not, you could have ended up waiting till some proportion of the recovery was already over; before staggering into reinvesting again.
The lesson – It’s rare for one to catch the bottom and then be able to invest all the surplus lying in the sidelines on that day. Keep investing experiences simple. The only way to manage the peak or a bottom or a sideways correction is to continue regular investments.
The best way is to automate this through systematic investment plans, be it in mutual funds or direct equity. Periodically, as you keep getting lumpsums, continue to top up existing equity portfolios and you can stagger that too with a simple instruction to your advisor to add a third or a fourth of the surplus at a pre-defined interval.
Key Take-away -> Always stagger your investments, never stop them.