Should You Invest in Stocks When The Market is High?

The Indian stock market is presently reaching unprecedented heights, with the Nifty surpassing the 22,600 mark and the Sensex exceeding 75,000. While investors who have already ventured into the market relish the thrilling journey, what about those who have yet to take the plunge or are considering investing?

Amidst record-high stock market indexes, newcomers to the stock market or recent entrants find themselves grappling with uncertainty about their next steps. Here are two common questions likely swirling in their minds:

Should I hold off for a market downturn or correction?

Or should I seize the opportunity to enter the market now? Having already missed out on several months, what if there’s no market downturn and the bull market persists? I’m wary of missing out on this potential opportunity.

Ultimately, the primary question remains: Is this the optimal moment to invest in stocks, or should one exercise patience and await a potential correction?

Should you invest in stocks when the market is high?

If you approach it logically, refraining from investing in the market when a crash seems imminent makes more sense. Why invest in stocks if their prices are poised to plummet tomorrow, allowing you to purchase them at a cheaper rate? Placing your funds in the market at the wrong time is a major concern for many investors.

But how certain can you be that the market will crash tomorrow or in the near future?

If you happen to know the exact date or even the approximate month, please do share it with me. I’d gladly liquidate my entire portfolio, hold onto my funds, and only reinvest after the crash.

“I spend about 15 minutes a year on Economic Analysis” – Peter Lynch

This quote is from Peter Lynch’s renowned book ‘ONE UP ON WALL STREET,’ which I highly recommend reading. Lynch argues that individuals who dedicate excessive time to analyzing the economy and predicting market crashes are essentially wasting their efforts. They could achieve greater benefits from the market by devoting the same amount of time to researching individual stocks.

Truth be told, no one can accurately predict when the next major market crash will occur. Even the most esteemed market experts and economists have failed to do so. Otherwise, they would be the wealthiest individuals globally, not Warren Buffett, the Oracle of Omaha.

Once you acknowledge that predicting the future is beyond your capabilities and thus, you cannot foresee a market crash tomorrow, let’s reconsider the decision to abstain from investing in stocks.

To recap our discussion thus far: Firstly, you cannot predict when the next significant market crash will transpire. And secondly, you recognize that the market has the potential to deliver favorable returns on your investments.

Presently, bullish sentiments dominate the Indian share market. However, it’s uncertain whether this bull run will persist in the future. The bull market may conclude next month or extend for several more years.

With all these uncertainties, the best approach that you can take is to invest systematically in the market.

Don’t solely focus on market indexes. Even amidst a bull market, numerous companies are hitting both 52-week highs and lows.

It’s simpler to assess individual stocks independently of the market (at least for a while). If you identify a promising stock trading at a reasonable price and believe in its potential for substantial future growth and high investor returns, consider investing in it. With over 5,000 listed companies, not all of them can be overpriced simultaneously.

Nifty and Sensex indexes comprise only 50 and 30 large companies from NSE & BSE, respectively. Consequently, they may not accurately reflect the performance or valuation of many mid-sized or small companies listed in the market. A sample of 50 companies cannot provide an exact outlook for all 5,500 listed ones.

Identify quality companies and invest in them, regardless of market highs or lows. Even during the bear market of the Russia-Ukraine War time, numerous stocks delivered substantial returns.

There’s a popular saying in the Western world regarding stock market investment: “TIME IN THE MARKET IS MORE IMPORTANT THAN TIMING THE MARKET.”

This suggests that staying invested in the market for an extended period yields better results than trying to time the perfect entry.

Don’t delay getting started. Long-term investment in the Indian stock market is key to wealth creation. Since November 2023, the Indian stock market has been at record highs. If you’ve hesitated to invest during this period due to market highs, you’ve already missed out on six months of the bull run, during which many have amassed significant wealth.

What is the best approach for new investors?

For novice investors, I suggest adopting rupee cost averaging or SIP (Systematic Investment Plan) in stocks, which essentially means investing a fixed amount of money each month.

If you’re unsure about the future price movements of a stock but believe in its strong fundamentals, employing the rupee cost averaging method is prudent.

Allocate a portion of your investment each month into the stock over the next 5-6 months to average out your purchase price.

Furthermore, steer clear of lump sum investments, where you invest the entire amount at once.

Few Additional key points for Newbie Investors

1. Even the most severe stock market crash couldn’t obliterate the wealth of long-term investors.

I understand that the word ‘CRASH’ can send shivers down the spines of most investors. Despite all the rationale I may provide for investing, upon hearing this word, you might reconsider and think, “Maybe I shouldn’t invest now. Perhaps the market will crash soon, given its current record high. I’ll invest later.”

If only making investment decisions were that simple. No one can accurately predict the exact date of a stock market crash. And if we can’t control or foresee something, it’s not worth dwelling on. However, what we can do is analyze historical data.

Let’s examine the worst stock market crash in Indian history – the 2008 Stock Market Crash.

The most significant drops occurred on two consecutive days – January 21st and 22nd during the 2008 recession. On these days, the BSE Sensex plummeted over 2,000 points. Additionally, there were seven trading days in 2008 when the Sensex fell by over 1,000 points.

Though I wasn’t actively involved in the market at that time (being too young), I can envision the panic. Market experts often say that every investor is bound to experience at least two major stock market crashes in their career. I suppose that might count as one for me and the COVID crash as the second 😉

Source: Trading Economics

The crucial point to note here is that even during the most severe Indian stock market crash, long-term investors’ wealth remained intact.

Looking at the chart above, you’ll notice that even if you had invested at the peak of 2008 and held your investments for longer time period, you would have still garnered decent returns from the market.

Furthermore, as previously mentioned, predicting the timing of the next crash is an exercise in futility. It could occur within a year, five years, or even decades from now – the future remains uncertain.

Moreover, consider the scenario akin to that of 2005 when the stock market was still soaring at all-time highs, marking the inception of a bull run. Those who refrained from investing in 2004/05 due to the perceived high market levels missed out on a bullish phase lasting over three years. For context, during this period, the NSE benchmark index Nifty delivered impressive returns of 36.3% (2005), 39.8% (2006), and 54.8% (2007).

In FY 2023-24, the Nifty provided investors with a substantial return of around 28%, which some may deem significant.

I can’t predict whether a market crash will occur in the future. What I can say is that the Indian economy is currently experiencing a significant boom. By not investing in stocks, you risk missing out on one of the most substantial stock market rallies.

2. The Perfect Moment is Elusive:

Today, the market is soaring, deterring you from investing. But when stock prices plummet tomorrow, and companies reach their all-time lows, will you have the courage to enter the market?

Nailing the exact bottom to buy or the pinnacle to sell is incredibly challenging. Frankly, those who manage it are often more lucky than skilled. Furthermore, it’s not a replicable feat. Even if achieved once, it’s unlikely to be repeated consistently.

Waiting for the market’s lowest point to enter or attempting to exit when it’s at its peak is a formidable task. How can you be certain that it’s truly the bottom or the top?

Ultimately, rather than attempting to time the market, focus on long-term participation. Remember, as always, spending time in the market is superior to timing the market.

What Strategy Should Experienced Investors Employ?

For seasoned investors who have already entered the stock market, it’s crucial not to exit simply because the market is soaring or your stocks have hit their 52-week highs.

If your investment horizon is long-term, it’s inevitable that you’ll encounter periods when the market is at its peak. Are you planning to exit every time? Many of the most successful investors are known for holding onto stocks for 10-15 years, even when those stocks reach new highs multiple times during this period.

The late Rakesh Jhunjhunwala, known as the Big Bull of India, acquired shares of Titan Company in 2002-03 and retained them until his passing in 2022. Throughout the last 15-16 years, there were undoubtedly many instances when the market was at its peak. However, as a long-term value investor, Jhunjhunwala refrained from selling the stock simply because the market was high.

In essence, don’t rush to exit your investments just because the market is on an upswing. You may never have the opportunity to re-enter the market at the same favorable price point where you initially invested.

Conclusion

The fact that stock market indexes like NIFTY & SENSEX are currently high shouldn’t dissuade you from investing in the share market. When considering investments in the stock market, focus on individual companies rather than the overall index. If you identify a promising stock at a reasonable price and believe in its potential for significant future growth, don’t hesitate to invest in it.

The reality is, you can’t accurately predict whether there will be a crash or a prolonged bull market ahead.

The key to success in stocks lies in minimizing risks, not avoiding them altogether. By investing intelligently in stocks, you can mitigate risks even during market crashes, corrections, or bear markets. However, if you choose to stay out of the market entirely, you’ll miss out on potential benefits, even during periods of market upswings.

BONUS

What’s the Golden Rule for Wealth Creation for Investors, New and Old alike?

Invest for the long term. Identify fundamentally strong stocks and hold onto them steadfastly, regardless of prevailing public sentiments. Don’t wait for the perfect moment to enter the market. Many have attempted to time the market and failed, and you likely will too.

Some may perceive this as a conservative approach. However, considering that long-term investments have been the cornerstone of success for numerous stock market investors, generating substantial wealth for them, it’s a strategy that can certainly lead to significant wealth accumulation for us as well.

THAT’S ALL! I trust this post will be valuable to readers.

Let’s conclude this article with one of my favorite quotes on investing:

“THE BEST TIME TO INVEST WAS YESTERDAY. THE SECOND BEST IS TODAY. AND THE WORST IS TOMORROW.”

Kritesh (Tweet here) is the Founder & CEO of Trade Brains & FinGrad. He is an NSE Certified Equity Fundamental Analyst with +7 Years of Experience in Share Market Investing. Kritesh frequently writes about Share Market Investing and IPOs and publishes his personal insights on the market.