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Why you shouldn't flirt with the Sensex

Larissa Fernand | January 18, 2005

Should you invest in shares now?

It was only a matter of time.

Just when the stock market was on a roll and everyone was having a ball, the Sensex began to fluctuate and throw tantrums -- share pricesrose and fell rapidly.

Either you panicked or werehappy with the situation -- depending on whetheryou wanted to sell shares or buy them.

Let's recap.

The Sensex began the New Year with good tidings. On January 3,it touched a historic high of 6684.

Thevery next day, it touched 6696 as theprices of sharessoared.

On January 5, it dropped slightly to 6629 and kept sliding till it touched 6440 on January 7 (I amreferring to the highs here). It climbed slightly the next trading day, before itbegan dropping again.

Then, on January 12,Y V Reddy, governor, Reserve Bank of India, suggested a tax on foreign institutional investment to check the volatility in the stock market.

Like a jilted lover, the Sensex pouted for a while. And how!

It touched a low of 6070 taking share prices along with it.

As if on cue, Union Finance Minister P Chidambaramsoon entered the scene to soothe frayed nerves. He said there was no proposal to put a cap on (limit) the inflows or tax them. What's more, G NBajpai, chairman, Securities and Exchange Board of India, echoed the finance minister's assurances.

The Sensex grudgingly inchedto a high of 6242 on January 13, but kept a low of 6138. It increasedslightly the next day,but on January 17, touched a low of 6087 and a high of 6232.

Instead of looking at who the party pooper is, or viewing all of this as a bad omen, it would be wise to shrug this slump off as the inevitable 'correction' that was to come sooner, rather than later.

Don't get intimated by this term. All it refers to is a relatively short-term drop in stock market prices.

This tends to happen whenprices have been consistently rising for a period of time. It helps the marketcool down when things get too heated.

Where does that leave you? Should you slip out of the party, stay on or decide to enter now?

Exit or hold on?

If you have already invested [bought shares], please don't panic. Don't rush tosell the shares you own. There is no reason for you to do so.

January may not have been as bullish as some anticipated. On the flip side,you don't have to strain very hard to see that times have beengood. Eventhe strongest bull markets seescorrections from time to time.

"Volatility is natural in equity markets [the stock markets]. Given the kind of relatively unchecked rise we witnessed in the Indian markets post-May 17, 2004 [Black Monday], till recently, these sharp swings are inevitable," says Ashok Kumar, CEO, Lotus Knowlwealth, a Mumbai investment advisory firm.

Let's refresh your memory about what happened. Early 2004 saw the Sensex touch 6248.

Then the slide began. On May 17, the Sensex opened at 5020 and touched a low of 4227 to finally close at 4505 -- all in one day! That earned the day the infamous term, 'Black Monday'.

Volatile markets are part and parcel of a bull run.So it should come as no surprise if the markets were to remain volatile (sharp rises and downturns in the Sensex), till the Budget and perhaps even thereafter.

Some feelthe market will rebound (bull run will resume) by the end of this month, but there is no denying that volatility will stay till the Budget (February 28).

Analysts vary in their long-term predictions of what heights the Sensex could scale this year. Calculations vary from 6800 to 8000 by the end of the year. There is huge discrepancy in the figures, but what is clear isthey all see an upward trend.

So here's what you can do. Don't sell now unless you are getting a price that makes you happy.If not, continue to hold on to your shares. The Sensex will rise and you will get a good deal later.

Want to enter?

Prices have dropped. Why not pick up shares now?

This appears to be a good time to buy the stocks you wanted but didn't earlier, when the marketslumped earlier this year.

But, as Nimish Shah, director and CEO, Parag Parikh Financial Advisory Services Ltd, observes, "Investors would require nerves of steel to hold on to stocks they like as the market is expected to remain volatile."

His word of advice: "Have faith -- first in the economy, then in the company you want to invest in, and last, in your own judgement."

Problem? Itis anybody's guess when the market will bottom out. This is a suave term used todescribe the moment the index hits rock bottom before it starts moving upwards.

Truth is, no one knows when 'rock bottom' has been hit. Everyone is groping in the dark when they make predictions on whetheryou should buy now or wait till the market drops further.

As an investor, you need to be bothcautious and alert.

Consider buying shares only if you are looking at holding on to them fora year or more (12 to 15 months is a safe bet).

Consider a staggered accumulation strategy: buy gradually, instead of buying atone go. Buy some shares now, wait and see what the market does. If prices fall further, buymore shares.

A strong word of caution

The Sensex has turned fickle. Be careful not to flirt with the market right now.

If you areserious about investing in the market, look at a long-term commitment. You couldgetlose your shirtif you are thinking short term.

What's in a share? Money!
Make money with shares
What to do with your money

Image: Dominic Xavier

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