Where are the stock markets headed for? – This is a question that most of the stock market participants perpetually have on their minds. More so, when there is a major event that is expected to happen/ has happened. Case in the point – Recent election results in India, wherein the incumbent Narendra Modi led NDA government winning a clear majority.
With Sensex hovering around 40,000 mark and Nifty hovering around 12,000 marks, where are the Indian stock markets heading for?
(Replace the context, numbers and the indices and the countries, and frame an appropriate question for your own country. This questions almost always remain!)
Optimists will be gung-ho about returns – few expecting these indices to double in next 5 years! Pessimists will raise serious doubts. Analyst will fall into both these categories. Better still, some may try to balance and be both optimist and pessimist at the same time!
Amidst all this, the fact is that – Nobody knows for sure where the stock markets are headed for!
Direction of stock markets depend upon lot of parameters. – Macro economics, government policies, global environment and maybe 999 other variables impact the markets. Indices comprise of individual companies. And their direction depends upon these variables, and more – most important of them being their earnings (and ratios derived from this!). Then there can be black swan event(s), as Nicholas Taleb puts, which can make your calculations go completely haywire!
We all (laymen and experts included!) can make calculated guesses based upon our own understanding and observations. Some of us will probably be right – not just because of prediction superpowers!
Historically, returns in long run have been good in India and most of the countries. And with a growing economy (and hopefully with lot of things falling in place!) returns are likely to be good. However, returns from stock markets are not “assured” as it is often “sold”. So your equity or mutual fund portfolio can give good returns. But they can also give no returns or negative returns!
What does one do as an investor if one is unable to predict the direction of stock markets?
Here are 3 things I believe one should understand about the directions of the markets and act accordingly.
- Be aware of the uncertainty. Markets are uncertain. They can surprise you – in positive as well as negative direction. It may be good if one is not too surprised on being surprised by markets. Optimism is good. So is balancing it with pragmatism.
- It is advisable to have an asset allocation strategy. This should keep into account the good as well as bad times in markets! Capital protection and capital growth – both may be important for most of us. Try to understand the risks and expected returns and plan accordingly.
- Not one can accurately predict the direction of the market. At max one can make a calculated guess. Your guess may be right or maybe completely off. Anyone who is absolutely sure of the market is lying. But despite these, some of these estimates maybe right – in hindsight!
What are your thoughts? Where do you think stock markets are headed for? Do share.