Many investors with high risk appetite prefer to invest in direct equities. When the stock market trades close to its all-time highs, some investors would be contemplating whether they should stay invested or exit their current investments.
They fear that if the market falls from this level, they may lose their assets. Also, they don’t want to miss out on potential gains, if the market continues to hit new highs in the coming days.
So, what should they do?
What should be their investment strategy in stocks when the stock market is at an all-time high? I have discussed some useful points in this regard.
- Consider investing in dividend paying stocks
- Avoid speculation
- Follow strict stop-losses on short-term investments
- If you are a beginner then avoid excessive investment and use SIP mode
Consider investing in dividend paying stocks
Stocks can give you a return on investment in two ways: through capital gains or dividend income through which companies share their profits with shareholders. If the company you invest in is cash-rich, is generating regular income, and is low on debt, it is likely to pay dividends. Typically, companies that consistently provide high dividend returns are less prone to market volatility. Therefore, even if the stock market is trading at an all-time high, you can consider choosing stocks that have strong fundamentals, excellent dividend payout history and the potential to offer consistent dividends in the future.
However, before investing in shares of dividend paying companies, it is important to understand the tax implications as well. Dividend income is taxable in the hands of investors. Therefore, if you receive dividend income, you will have to pay tax on such income as per your applicable tax slab rate. Read impacts of retained earnings on shareholders investment decision.
Avoid speculation
Going in and out of stock investments over a short time frame to make more money is generally considered speculative. The main difference between investing and speculating is that the former focuses on analysis and risk management to earn an anticipated rate of return, but the later does not rely on research – instead it focuses on the ‘probability’ to earn income. When the market is at its peak, you should be prepared with all kinds of strategies to mitigate the associated risks. Investing after thorough research can help you avoid losses.
Follow strict stop-losses on short-term investments
As the name suggests, ‘stop-loss’ is a pre-determined threshold level by the investor, beyond which he exits the investment position in order to minimize further losses. For example, suppose you have invested in 1000 shares of ‘ABC’ at the rate of $1.50 per share. The price of ‘ABC’ shares starts falling after a few days. When it reaches $1.30, you decide to set the stop-loss at $1.24
This means you will wait till it drops to $1.24 to exit the investment position. The next day, the stock opened at $1.22 triggering your stop-loss and you invested $1,500 in ‘ABC’ and made a loss of $280 ($1,500 - $1,220). But later the price of 'ABC’ fell to $1.12. Since you did not have a position in ABC stock, you avoided large losses due to your stop-loss.
As such, it is important to strictly follow your stop-loss while investing in stocks. This can help minimize your losses. When the price of your stock rises, you should shift the stop-loss upward or simultaneously according to a predetermined percentage of the stock’s price to ensure that you can lock in the profit. The process of gradually shifting the stop-loss with the movement in the stock price is called trailing stop-loss.
Diversify your investments among fundamentally strong stocks
There are many benefits to choosing fundamentally strong stocks, including a faster recovery after a stock market crash. Therefore, when selecting stocks in your portfolio, focus on fundamentally strong stocks with a solid track record, low or zero debt on the books, good cash-flow levels, high growth in revenue, attractive profitability and a promising growth plan.
You should aim to adequately diversify your investments in different sectors and in stocks of other companies to reduce the risks. Having additional exposure to a single sector and a few companies can increase your risk if that particular sector or stock underperforms.
Read also: Impacts of Capital Market on Shareholders Return
If you are a beginner, then avoid excessive investment and use SIP mode
Before investing in the stock market, you should assess your risk appetite. Always invest as much as you can afford to lose. The stock market is highly volatile, you should invest only if the daily fluctuations do not affect your daily finances. If you can analyze the stock market, direct investing in the stock market can be highly rewarding in the long run provided you understand the risks as well.
It is important to avoid over-investing, that is, investing beyond your risk appetite and financial capacity. If the market conditions turn unfavourable, over-investment in stocks can result in huge losses. For beginners, Systematic Investment Plan (SIP) investment in top rated equity mutual funds can be a better option to earn good returns over the long term.
To Save or Invest Money for the Future?
Are you saving for the future? no or yes?
If that’s the case, you might be wondering what a stupid question this is, because it’s so obvious that money needs to be saved for the future. We all do that too!
You are wrong!
Many investors are up to date when it comes to saving money but are not forward in thinking when it comes to investing. They are simply putting their savings into the future and relying on luck or perhaps they are not putting in enough energy to save money.
In this article we are revealing 10 simple reasons why one should save and invest their money for the future. Let these 10 points to serve as a reminder for you. Note that when we say “save” in this article, we mean “save and invest.”
1. It will help you in bad times
We all know that life is dynamic and bad things can happen. You may lose a job one day. Or it can cost a lot of money to hospitalize a loved one. You never know what the future holds!
If you have enough savings, you will be able to handle the situation better and you will not have to run to other people for money. There are always phases in life when things go wrong and if you don’t have savings, it can upset you! So saving helps you in bad times!
2. One Day You’ll Stop Winning
Sometimes I wonder why so many people forget the simple thing that one day they will stop winning.
It’s called “retirement”
I have seen many people in their 30s and 40s who behave as if they will continue to have a salary in their bank account for the rest of their lives. They don’t try hard enough to save money. They keep delaying their investment plans and one day they realize that they are now in the danger zone!
Don’t forget that once you start your job, the expenses will never stop thereafter, but your profit will come until you are 55-60 years old!
3. Have peace of mind
You always feel a sense of security and peace when you have enough money to support you. I’m talking about the day-to-day feeling when it comes to bad news.
Imagine situations like:
Negotiating layoffs at your company
Thoughts of hospitalizing someone in the family.
The news of increasing rates from your children’s school.. again !!
All these little things in life will bother you subconsciously and you will not get peace of mind because you know deep down that you have neither savings nor less money. If something happens to your job, how do you handle things?
If you’ve worked for many years, you’ll agree that there are some tough days when you just feel like getting away from it all and relaxing and enjoying life. You feel weary of corporate life and this rat race and you only ask yourself, “If only I had enough money in my bank account!” ..
It is also very stressful and you may feel alone compared to your peers. That’s why it’s important to start saving for the future!,
4. Be financially free
We all want to reach a point in life where we do not have to completely depend on our wages. We all want to create a level that is high enough to generate some income so that we can at least manage our basic expenses. I mean financial freedom.
When you start working you don’t have wealth and you have to depend 100% on your salary. But over time, the value of your basket of funds should increase so that you can, if necessary, withdraw money when necessary.
If someone needs $1,000 a month for his expenses and has a savings $12,500, then deep down he knows he has money for at least 1 year.
With $120,000, it can last for 8-10 years (don’t consider inflation)
This way, you reach a point in your life where your money alone is enough to create an income stream that at least covers your basic expenses, if not a luxurious lifestyle.
If you’ve started your wealth-building journey on time, you’re slowly moving toward financial independence, and perhaps between your 40s and 50s (don’t confuse it with your retirement) you’ll have some level of independence.
5. So that you do not fall into the debt trap
Remember that people in debt trap started small today. First, they took a small loan, and then they continued with it, they didn’t manage it well and now after many years, they are in deep debt trap. Think about why they even started with a small loan like a credit card loan or a small 2 lac personal loan.
It’s because they didn’t have enough money left!! The root cause of debt trap is that people do not save for the future and then gradually have to depend on debt to meet their needs and requirements.
6. Feeling of progress in life
A sense of “progress” is very important in your financial life. You may have zero bank balance at the beginning of your career. But if after working for 8-10 years you have little to show then it crushes you from inside.
It’s like running for hours, only to find you haven’t moved much. If you do not save on time, then for a period you may feel like a failure as you do not see any progress in your money.
If your net worth doesn’t increase, you are probably a rich slave and nothing more. Think about it!
And building wealth over time isn’t too difficult. Even a small amount can turn into a large amount over a long period of time.
7. Handle major life events
Many important events will come in your life.
School fees for children (recurring),
Vacation (Recurring),
early childhood education higher education,
buy house,
Car Updates (Recurring),
home renovation,
retirement
And lots of little incidents that will constantly demand money!
What are you going to do if you are not going to save enough for the future? Does it depend on the loan? Caught in a debt trap?
Starting your wealth building journey early in life increases the chances that you will meet these financial goals with less stress and without compromising on time!
8. So you can spend without feeling guilty!
Many families are not taking enough vacations or not spending enough on themselves. They keep on taking shortcuts and often try to pretend that they are ordinary people and they do not believe in losing money. But deep down it is because they have no wealth at all!
This means that every so often, they often feel guilty for spending money. They feel that they are doing something wrong. They are depriving themselves today, so they don’t have to deprive themselves of their future!
It affects not only them, but their spouse, children, parents and everyone around them at some level. A good financial life is not just about saving money, it is about spending money wisely!
So start saving today so that in future when you have to spend money on things you love, you can do so with a free mind without any guilt!
9. Explore alternative career
Many people are not happy with their work. They feel stuck and want to do something about it. But once you get a home loan and have no other skills, it becomes a permanent job for you.
You cannot give up and explore other career options as you do not have a backup plan. Forget about changing careers, ask yourself if you can take a 2-3 year break from work. Do you have enough money to return it?
If you save enough today, there will come a time when you will feel more comfortable making that kind of difficult decision. Having money on your side – gives you enough power to tell your boss that it sucks and you won’t come the next day!
You will be able to take calculated risks in life and try many things… so start saving now!
10. Do it so you can leave a legacy
Some people inherit property or a large portfolio/business from their parents. Investing in the stock market is a way of securing a future for your children.
It may not solve all the issues in your life but you have one less big thing to worry about in life. You just build on that!
Maybe you didn't get an inheritance because your parents messed up their retirement and didn’t create enough wealth. You can choose not to do this to your next generation. This is a subjective and not everyone is excited or agrees with the idea of leaving a legacy.