Worried over all-time highs? here's what to do

The current equity markets' high and the continued momentum has become a concern for many investors. All the while, they've enjoyed the higher returns on their investments but now are concerned about the historical high P/E (price-to-earnings) and various other such factors which are at unprecedented highs. This is making many jittery about what could be the future in store and with the anniversary of last fall nearing, experiencing an anchoring bias of sorts.

Just to give you a perspective about market gyrations, even when observing at Nifty 50, the broader benchmark index had 65 all-time highs (ATH) in 2017 on a daily basis, of course during intra-day sessions. That means, the index didn't close at a high but touched a new high during the trading hours. Such instances were reduced to 28 in 2018 and mere 16 in 2019. The ATH of the same index had 28 such instances in 2020, probably the most tumultuous year in our recorded memory. It had already recorded 16 such events in the brief one-and-a-half-month old of 2021.

Of course, in early January 2008 when the index hit ATH, it had experienced a drastic fall with the onset of the Great Financial Crisis and it didn't bottom i.e. another fall till November of that year. From there to create another ATH, the index took time till early December 2013, that's close to 5 years from the earlier one. This was also the most difficult times for the investors and advisors alike to remain invested in equity markets. This was compounded with higher inflation and India being part of 'Fragile Five' events as markets moved sideways for most of that period.

Oh, I didn't mention about the crashes or falls which the highest being about 60 per cent from the ATH with sporadic negative 10's, 20's and even 40's. The big fall in less than a year, in March 2020 was over 40 per cent from its high and no one anticipated the spectacular recovery in such a quick time to where we're currently standing at. The most vital inference of the above analysis is the importance of staying invested.

In my last post, I was arguing if this is the time to book profits or when is the right time to book profits; I brought these statistics just to present you that it's not an easy decision. Robert Kirby, an investment advisor who conceived the 'coffee can' investing, had equated the equity markets to a pendulum. He said that it swings between three o'clock on one side and nine o'clock on the other. At three, fear takes over and its full panic. At nine, greed takes over and its full manic. At six o'clock there's a point where logic and balance exist, where valuations make a lot of sense to most rational people.

Unfortunately, the pendulum doesn't spend much time at six o'clock, if you've been in this business 40 or 50 years you can probably look back on three or four months - an accumulation of a number of two or three week intervals - where it's six o'clock and prudent men seem to be in control. He further said that at nine o'clock, the best and the brightest of the minds in the business have focused on finding a rationalisation or an explanation of why the mania of the moment really made sense. The market is screwy most of the time. Today it is particular screwy. This he quoted during April '99 when the dotcom boom was in full swing.

Taking a leaf from Buffet on investing – 'be fearful when others are greedy and be greedy when others are fearful'; one has to exert caution when the pendulum hits 9 o'clock. This is when the stocks are overvalued and the risks are higher with possible future returns lower than the past. While no one is sure of what's in store of future, one could counter these swings through a diversified portfolio. This is like putting a foot at the door for the next opportunity to get off while enjoying the ride for now.

A portfolio could've diversified assets that range from equities, debt and other assets like gold, REIT (Real Estate Investment Trusts) and even crypto currency (mayn't be for the faint hearted, though). This ensures that you retain the greediness while not having to live with the guilt of not participating in a bull run. The portfolio should, however, reflect the risk appetite, timelines and allocations across the assets accordingly.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])