The stock market in India witnessed plenty of volatility in 2016, with investors dancing to the tune of various economic and political events that took place domestically and internationally. Brexit, Raghuram Rajan’s exit from the RBI, Donald Trumps’s win in the US elections, the Uri surgical strike, and the demonetisation scheme were some of the events that rocked the Sensex last year.
While some of these Sensex rockers were predicted, others took investors by surprise. However, these events and the resulting movements in the market taught us many lessons with regard to equity investing.
This is what we learned from 2016:
Speculation has an effect on the market
The uncertainty and risk aversion that takes place around any event, sometimes purely on the basis of speculation, has the potential to move the stock market. There was a lot of fear and apprehension before Brexit and investors were largely of the opinion that Britain would remain in the European Union.
However, following Brexit, the stock market in India dropped by 2% due to the rise in fear of the UK being isolated since this would mean entering into a new set of trade agreements with other countries that used to deal with the EU as one block.
However, the market recovered in a few weeks and it was back to business as usual. A week before Brexit, the Sensex had dropped by 0.76% when Raghuram Rajan announced his decision to leave the RBI. This was driven by the speculation that the rupee would lose value without Rajan at the helm.
Fundamentals of companies are more important than events
A company’s stock price is affected more by the company’s fundamentals such as its earnings base and valuable multiple than any event. While a market crash or slowdown may impact a company irrespective of its fundamentals, it tends to bounce back if its fundamentals are strong.
Patience is crucial to make money in the stock market
Patience and calm, calculated decision making are keys to equity investing, whether it’s through direct equity or Mutual Funds. Trying to time and beat the market may lead to miscalculated steps. Staying invested over a period of time without being impacted by temporary movement and speculation ensures wealth building.
Avoid herd behaviour
Following the herd could cost you big in the stock market. This can be better understood by looking at the after-effects of demonetisation. Due to the uncertainty in the market, investors rushed to jewellers to convert cash into gold. The increased demand led to a temporary hike in price, but with government regulations tightening the noose around these jewellers, the prices came down.
As of March 2017, with Nifty at a record high and the Sensex also approaching record levels, there may be plenty of first-time investors who think this is probably a great time to start investing in equity investments. But, if they haven’t done their investment research, they are likely to court disappointment.
Equity investment is one of the best ways to build long-term wealth. However, due diligence must be carried out in advance. Equity investments are prone to volatility and must be considered only after careful evaluation of risks and returns.
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