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What lessons investors can learn from the year 2020? And what should be investment strategies for 2021?
The year 2020 can be considered as a most volatile year in the history of equity market. In the first half of the calendar year the benchmark indexes were supported by a few numbers of stocks, while most of the individual stocks were in their 52-week lows. In the second half domestic equities registered sharpest recovery yet in a calendar year and hit all-time highs following positive cues around vaccine development, US presidential election outcome, healthy resumption in domestic economic activity, abundant liquidity and bountiful monsoon. Steady FII inflows, low yields in debt products, wider retail participation and attractiveness of broader market remain supportive for investment in domestic equities.
Below are few lessons one can learn from 2020:
- For the short-term the market always remains unpredictable. While in long-term equity investment remains one of the best asset class that can give inflation beating return. Therefore, it always prudent to follow a strategy that you can stick to as opposed to take action on the basis of predicting the market on a daily basis.
- Investment decision should follow your original strategy and any action influenced by emotional decisions can derail your finances.
- Don’t put all the eggs in one basket. The importance of diversification of portfolio clearly got demonstrated in the period of crisis. In this ultra-low interest rate environment, high-quality bonds still serve an important purpose in most investor portfolios. Portfolio allocation towards high-quality fixed income provides a psychological benefit by minimising volatility, which helps investors keep their emotions in check.
- Market crisis creates great opportunities to invest. This is a very famous investing theory of Warren Buffet, which one needs to keep it in mind while deciding on the time to enter the market purely based on his/her risk appetite.
- No one can time the market exactly. Therefore, waiting for the perfect time to invest is a myth. Instead of focusing on the ideal time to start an investment, which isn’t in one’s control, one should focus on preparing a disciplined process to invest and add money over time and withdraw when you feel it’s beyond your risk appetite.
Investment strategies for 2021:
- While we are not completely out of woods yet, with the availability of the vaccine in sight, and improving global and domestic economic landscape on multiple fronts indicate that the year 2021 will not give as much market surprises as was in 2020. Therefore, one can keep a watch on the beaten down sectors such as PSU, power, real estate and FMCG as these can show some recovery.
- It’s time to clean your portfolio by liquidating low quality stocks and diversify to high quality underperformers. Also protect your profits by hedging with few defensive sectors.
- Stick to bottom-up approach. Be stock selective based on fundamentals. Look for the strong companies getting stronger. Focus should be to identify companies which are increasing their cash flow, margins, market share, shareholders value. They may be priced at a premium but still it will be worth the cause from long term perspective.
- One can find a lot of opportunities in mid and smallcap space. As the market is expected to continue a broad-based growth, there will be value investing opportunities available and recovery will be more visible in small and midcap companies.
- 2021 will also give ample of opportunity to enter the market. There is nothing like a perfect time to invest but a disciplined approach to investment yields good results.
- If you were lucky to enter the market in the mid-crisis of 2020 and sitting on high profits, don’t expect the similar kind of return in 2021. Keep that in you mind, while making the investment strategy. Keep investment horizon longer rather than being panic by short-term volatility.
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