Topic 4: 5 key lessons from 2020 that can make your 2021 Diwali brighter
Here is a quick look at some lessons that we can learn from this year to make our investments work better for the next year.
Contrarian approach:
A contrarian is someone who buys or sells securities against the market sentiment. Hence, if the market sentiment is pessimistic and people are selling stocks, then a contrarian approach requires the investor to buy them. On the other hand, if markets are rallying and people are buying securities, a contrarian investor sells and books profits.
Number of stocks in the portfolio
In this year many investors were optimistic about the economy and markets were doing well. Hence, many investors started looking at different sectors and companies with varying market capitalisation to find the coveted multi-baggers.
However, as the pandemic sent markets south, these investors found it difficult to monitor and track the stocks in their portfolios. This was a huge disadvantage at a time when volatility was at its peak.
While the economy has started recovering from the initial COVID-19 shock, investors will do well by remaining aware of the latest developments around the world.
Unless the crisis tides over, investors might want to reconsider the number of stocks they hold in their portfolios.
Apart from the number of stocks, they might also want to analyse the quality of stocks and if they can withstand market volatility this year.
SIPs and SWPs
Many investors opt for a systematic investment plan (SIPs) to gain exposure to stocks over time while benefiting from Rupee Cost Averaging. If the markets are bearish, this helps them reduce the average cost of buying and a better opportunity to earn profits when markets bounce back.
Similarly, in bullish markets, many investors avoid selling their stocks at one time as prices are expected to increase. Hence, they opt for a systematic withdrawal plan (SWPs) and maximise their returns while booking profits. On the other hand, if the markets are bearish, then an SWP can be counterproductive.
With markets responding sharply to any news regarding the pandemic, volatility is likely to remain high. Hence, investors must reconsider the SIP/SWP modes of investing/redeeming investments based on market conditions.
Booking losses
The pandemic and lockdowns led to volatility in stock markets. While some investors sold their stocks and booked losses, others held on to their investments as they expected the market to recover soon.
However, the lockdown extended to more than six months and investors who had reassessed their investment portfolios and held on to quality stocks while selling the rest were in a better position than the others.
The strategy they followed was not making an investment decision in a state of panic. They also realised that with the changing market conditions, the portfolio needed to be shuffled.
This is the level of awareness that can help investors manage volatility in the market and position themselves to make the best of the opportunities available to them.
Diversify
While diversification was never meant to be an option, many investors considered it to be a luxury than a necessity, hence they wouldn’t strive to maintain a diversified portfolio at all times.
When markets turned volatile in March, some sectors recovered much faster than the others (eg the pharma sector).
Hence investors who had diversified across sectors and across asset classes managed to reduce their losses to a great extent.
Contrarian approach:
A contrarian is someone who buys or sells securities against the market sentiment. Hence, if the market sentiment is pessimistic and people are selling stocks, then a contrarian approach requires the investor to buy them. On the other hand, if markets are rallying and people are buying securities, a contrarian investor sells and books profits.
Number of stocks in the portfolio
In this year many investors were optimistic about the economy and markets were doing well. Hence, many investors started looking at different sectors and companies with varying market capitalisation to find the coveted multi-baggers.
However, as the pandemic sent markets south, these investors found it difficult to monitor and track the stocks in their portfolios. This was a huge disadvantage at a time when volatility was at its peak.
While the economy has started recovering from the initial COVID-19 shock, investors will do well by remaining aware of the latest developments around the world.
Unless the crisis tides over, investors might want to reconsider the number of stocks they hold in their portfolios.
Apart from the number of stocks, they might also want to analyse the quality of stocks and if they can withstand market volatility this year.
SIPs and SWPs
Many investors opt for a systematic investment plan (SIPs) to gain exposure to stocks over time while benefiting from Rupee Cost Averaging. If the markets are bearish, this helps them reduce the average cost of buying and a better opportunity to earn profits when markets bounce back.
Similarly, in bullish markets, many investors avoid selling their stocks at one time as prices are expected to increase. Hence, they opt for a systematic withdrawal plan (SWPs) and maximise their returns while booking profits. On the other hand, if the markets are bearish, then an SWP can be counterproductive.
With markets responding sharply to any news regarding the pandemic, volatility is likely to remain high. Hence, investors must reconsider the SIP/SWP modes of investing/redeeming investments based on market conditions.
Booking losses
The pandemic and lockdowns led to volatility in stock markets. While some investors sold their stocks and booked losses, others held on to their investments as they expected the market to recover soon.
However, the lockdown extended to more than six months and investors who had reassessed their investment portfolios and held on to quality stocks while selling the rest were in a better position than the others.
The strategy they followed was not making an investment decision in a state of panic. They also realised that with the changing market conditions, the portfolio needed to be shuffled.
This is the level of awareness that can help investors manage volatility in the market and position themselves to make the best of the opportunities available to them.
Diversify
While diversification was never meant to be an option, many investors considered it to be a luxury than a necessity, hence they wouldn’t strive to maintain a diversified portfolio at all times.
When markets turned volatile in March, some sectors recovered much faster than the others (eg the pharma sector).
Hence investors who had diversified across sectors and across asset classes managed to reduce their losses to a great extent.