When markets correct, investors waiting on the sidelines begin looking for opportunities. The reflex reaction is to buy stocks and funds that fell the most. Naturally, they believe that stocks with lower prices offer better value. But this need not be the case.
If an extremely overvalued theme or sector corrects, it could still be overvalued. A theme that falls 10% or 15% need not become attractive if it was trading earlier at sky-high valuations. The theme would have merely moved from being very expensive to expensive.
But investors anchored to peak prices tend to miss this. So, money is still invested at expensive valuations. After a prolonged bull run, investors risk hurrying to invest their money in the wrong places at the wrong valuations. This is why in the late stage of a bull run most money is invested in the worst places.
Over the last two years, we have seen funds quickly misallocated into expensive assets. Whether it happens through a mutual fund SIP or a direct stock portfolio hardly matters. Investors will still face a price correction, followed by a time correction. Investors who buy expensive assets at the wrong time are forced to remain invested in them.
When more capital is allocated to expensive stocks or mutual funds, correcting the mistake requires significant effort. Excessive time and money must be spent to correct that mistake. It is dawning upon investors that the mistake has already occurred in both the small-cap and mid-cap universes, affecting individual stocks and mutual funds. The time to have averted these mistakes in individual portfolios has passed. Now, investors are realising that they must live with the consequences of their choices, the timing of their decisions, and the gestation needed to recover. This will be a painful phase. Especially for investors who overextended themselves around the peak. The wait will be painful and longer than investors are ready for. Investing more money in the same assets may not help, as they’re now likely to remain out of favour for a while.
Now, investors must reinvent their portfolio with the right choices in assets, themes, and categories. The investment allocation should be carefully curated and continued, until portfolio performance is satisfactory. This is not an easy time for equity. Every investor needs to discover their inner strength and stay focused on investing responsibly. Corrections, wherever necessary, must be made in a clinical and surgical manner. Hope and prayer are not a strategy.
Decisive action and definitive change are needed now. Conviction should stay high when volatility indices in India and the US are near their highs.
