Bargain hunting to buying random stocks: 5 investment mistakes to avoid in a slowdown

Investors have a tendency to catch falling knives, but the fall in stock could be due to inherent weakness in their business model or corporate governance.
Bargain hunting to buying random stocks: 5 investment mistakes to avoid in a slowdown
Bargain hunting to buying random stocks: 5 investment mistakes to avoid in a slowdown

In the last few months, the Indian economy has painted a rather gloomy picture and is witnessing a slowdown. Consumption and demand have been low, corporate earnings have disappointed, FPIs (foreign portfolio investors) have been pulling out, the NBFC (non-banking financial company) sector is undergoing major liquidity, and the auto sector is in a slump. Overall, the sentiment is grim.

As a result, stock markets hit their lowest levels, a clear sign of pessimism among investors. At a time like this, you may be wondering if you should reconsider your investment strategy. If you invest in the stock market, you may wonder if it is a good time to sell or buy. With many stocks falling drastically, one may wonder if this is a good time to buy these stocks at a good price.

Experts are of the opinion that while there is slowdown in the economy, we are not in a recession. The way stock prices have corrected gives a feeling that we are in recession. The best time to construct a portfolio is during the tough time as during this period, good companies are available at very attractive valuations.

If you are re-looking at your investment strategy or wondering how to avoid losing money, here are some top mistakes to avoid:

Be careful while bargain hunting

Mohit Batra, founder and CEO of MarketsMojo says that investors have a tendency to catch falling knives. They would buy companies that have fallen the most thinking that they are available at good prices. However, the fall in stock could be due to inherent weakness in their business model or corporate governance.

Deepak Jasani, Head Retail Research, HDFC Securities says that investors should avoid averaging their losing investments every now and then, without checking the reasons for their fall.

If it is the business model or corporate governance, when the markets take a favourable turn tomorrow, these stocks may not go in the same direction.

Holding on to underperforming stocks

Many investors tend to hold on to underperforming investments on the premise that it has already fallen and may not fall further from here and hence don’t sell them. Deepak says that this may not be true if the conditions at the company have changed materially for the worse.

Don’t fall for a rally

Many investors tend to chase sectors that are in demand today. Mohit says that many times it has been observed that the sector that leads the  last market rally may not lead the next rally. “Example is Pharma. We also advise that one should have pre-decided maximum sector allocations to reduce risk attached to overexposure to one particular sector,” he says.

Don’t buy stocks randomly

One mistake many investors make, according to Mohit, is that that they buy stocks randomly and hence end up having too many companies in their portfolios. He says that the right way to take portfolio approach is with pre-defined threshold (based on risk appetite) on sector, market caps, topmost holding and so on. This will help to generate better returns for risks one would take.

Review your investments regularly

Deepak advises investors from going into a shell and not checking the performance of their investments or other possible investments. By doing this, he says that they are giving up once in many years’ opportunity to benefit out of sharp dips.

“It is necessary for investors to do a portfolio review and asset allocation review at 6-month intervals. In case they have done that, some cash would have been raised due to high weight of equities,” he says.

Despite the turbulent times that the market is seeing, market experts continue to be optimistic. Mohit says that those who have invested in mutual funds or SIPs (systematic investment plans) should continue with their strategy and there is no need to change the same.

However, according to Deepak, if your investments have lagged over the last one to one-and-a-half years, you could check reasons for this and even exit them to reinvest the proceeds in better opportunities. This applies even to SIP investments.

Deepak and Mohit say that at all times, turbulent or not, a proper asset allocation is what is most important. This means that you should not invest too much in one category or sector. Spread out your investments to not only reduce risks, but also generate higher returns.

“The best hedges are proper asset allocation, reviewing it at 6-month intervals, doing portfolio review of stocks and mutual funds, raising cash in good times and deploying it in a staggered manner in bad times,” Deepak adds.

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