Sensex and Nifty hit new highs every other day: Will this continue or is the big stock market crash imminent?

The Indian stock market has been on a remarkable journey over the past few months, with stock prices Optimism is rising to unprecedented levels. Investors, both seasoned and new, are riding this wave of optimism, but many are starting to wonder: when will it stop? Or, more importantly, what should they do in the face of so much uncertainty?

The market is governed by cycles of fear and greed, and in times like these it is easy to see how greed overtakes caution. Indian markets, driven by strong industrial growth and effective economic policies of the government, have made great strides. The Reserve Bank of India (RBI) has done a commendable job in managing inflation and interest rates. However, it is important to remember that even in a bullish phase, market correction cycles are inevitable and the famous “reversion to the mean” happens sooner rather than later.

The current bull run: a double-edged sword

There is no denying that India’s economic fundamentals are strong. Industrial production is rising, consumer confidence is buoyant, and government push for reforms has provided further impetus. But as stock prices have risen, so have concerns that some segments of the economy are failing. stock market Stock prices have far outstripped their reasonable valuations, meaning investors may be paying too much for future growth that may never materialize. Take the Initial Public Offering (IPO) frenzy, for example. New companies are hitting the stock market at prices that assume decades of uninterrupted growth. This is the classic “greater fool theory,” whereby investors buy overvalued stocks believing someone else will buy them at an even higher price. While this strategy works in rising markets, it is incredibly risky when a stock market correction occurs.

The nature of overvaluation: can it last?

While valuations in some segments of the stock market are undeniably high, it is also true that stock markets can remain irrational for longer than we expect. Stocks that appear overvalued today may rise even further before the final correction, whenever that may occur.

This creates a dilemma for investors: do they hold on to their investments and ride the wave, knowing that it can come down at any moment, or take profits and risk losing more gains? Howard Marks would argue that it is not about predicting when the correction will come, but about being prepared for it.

As one seasoned market analyst once said, “If you have 10% cash, you have 90% invested.” This means that even having a portion of your portfolio in safer assets, such as cash, will not fully protect you from a downturn. When markets fall, almost every stock (whether it’s a high-growth tech company or a defensive stock in a safer sector) and stock mutual funds will fall at the same time.

Emotional resilience: a key factor

In a stock market where share prices defy logic, emotional resilience becomes more important than ever. Many new investors have yet to experience a significant stock market correction. When that happens, fear will lead many to make hasty decisions: selling when prices fall, panicking when prices fall, or abandoning long-term strategies for short-term relief.

That’s why it’s critical to manage not only your investment portfolio, but also your emotions. Behavioral finance (a field that studies the impact of psychology on financial decisions) suggests that most investors act irrationally during times of extreme stock market volatility. That’s where the real challenge lies. Benjamin Graham, often called the father of value investing, said, “An investor’s biggest problem (and even his worst enemy) is probably himself.”

Common mistakes new investors make

A large portion of today’s stock market participants are new investors who have only seen the stock market in a state of bullish momentum. This group is prone to making some classic mistakes, such as:
1. Extrapolating growth too far into the future: Many investors assume that sectors such as technology or electric vehicles, which have shown rapid growth, will continue to grow at the same rate for the foreseeable future. But this type of linear thinking can lead to overvaluation.
2. Assuming the good times will last forever: Stock markets move in cycles. The current bullish trend may give the illusion that stocks can only go up, but history tells us otherwise.
3. Ignoring execution risks: Just because a company has a great business model or a promising future doesn’t mean it will perform perfectly. In times of euphoria, risks related to management, competition and external factors are often overlooked.
4. Double accounting growth: Some investors mistakenly believe that the growth potential already built into current stock prices will somehow provide further momentum. In reality, current prices often reflect not only current growth, but also future growth.
5. Match market frenzy with broad market opportunities: Some sectors, such as technology or fintech, may be experiencing exponential growth. However, this doesn’t mean that the entire stock market is a good buy. There are good value stocks out there, but it takes high-quality research to find them.
6. Changing strategies based on market fluctuations: Investors often let emotions dictate their decisions. On up days, they believe that stock markets will only go up, while on down days, they are convinced that a stock market crash will occur. Most also believe that they will exit their markets when they are at their highest or about to go down and enter them when they are at their lowest. No one has been able to do this with such consistency.

Navigating the road ahead: stay agile, stay cautious

So what should you, as a regular investor, do in the face of these market dynamics?
1. Diversify your portfolio: A well-diversified portfolio spreads risk across different asset classes and sectors. While it can be tempting to invest in high-growth sectors such as technology or consumer goods, it is important to also have exposure to safer assets such as bonds and gold, which can provide stability in times of volatility.
2. Avoid timing the market: Trying to predict when the stock market will peak or crash is an exercise in futility. No one can do it with any reasonable level of accuracy or consistency. Instead, adopt a long-term strategy that aligns with your financial goals. This doesn’t mean ignoring market signals, but rather preparing for both the good and bad times.
3. Rebalance your investment portfolio: If some of your investments have grown out of proportion due to the market rally, consider rebalancing. Selling a portion of overvalued stocks and reallocating them to undervalued or defensive assets can reduce risk.
4. Stay informed but don’t react to every headline: The media often exaggerates stock market movements, fueling euphoria or panic. Stick to your investment thesis and avoid making decisions based on daily news cycles.
5. Have cash on hand: Cash may seem like a boring asset for a while. bull marketBut it can be incredibly useful during corrections. Having some liquidity allows you to buy quality stocks at lower prices when others are selling out of fear.
6. Don’t fall in love with your actions: As stock markets continue to rise, it’s easy to develop an emotional attachment to certain investments, but remember that when a correction hits, you may have to sell even your favorite stocks.

And finally, prepare, don’t predict.

The current uptrend could continue for a few more weeks, months, or even years, but rather than trying to predict when a market correction will occur, investors should focus on being prepared for it. Diversification, emotional resilience, and a long-term view are key to navigating these turbulent times.

John Maynard Keynes was a good warner when he said that “stock markets can remain irrational for longer than one can remain solvent.” The goal is not to avoid corrections, but to manage them prudently when they occur. As Howard Marks would say: “Risk is not something that happens to you, it is something you take.”

The key lesson? Be cautious, but don’t panic. Keep your emotions in check, diversify your investment portfolio and keep your long-term goals in mind.

(The article is written by Sanjeev Govila, CEO of Hum Fauji Initiatives, a financial planning firm.)