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How to invest when stocks are overpriced

The market has hit an all-time high. Now is the feasible time if you are looking forward to investing. But there is one important aspect that you need to consider before you begin your investment ride- that is the stocks are overpriced right now. Hence, you should take the decision by first assessing your financial goals and future requirements. It is important that your investment decision should primarily be guided by the time horizon of your financial goals.

September 23, 2021 10:14 IST | India Infoline News Service
It was in the year 2008 when the market crashed significantly. However, ever since then, it has been witnessing the greatest bull ever! Industry experts estimate that the Sensex has boomed at a whopping 400% since the fall down! Fast forward to the year 2020, enters the pandemic and yet again the market hit an all-time low. The coronavirus disrupted all sectors and consequently, the national economy witnessed a dip.

However, in the present times, the market has hit an all-time high. Now is the feasible time if you are looking forward to investing. But there is one important aspect that you need to consider before you begin your investment ride- that is the stocks are overpriced right now. Hence, you should take the decision by first assessing your financial goals and future requirements. It is important that your investment decision should primarily be guided by the time horizon of your financial goals.

Investing when stocks are overpriced

Investment is a critical process that requires high levels of patience and composure. Taking decisions impulsively might make you repent later. Hence, you should sit down, think with a calm mind and devise an effective investment strategy.

Investing in the market requires two things- experience as well as the opinion of an expert. Before you initiate your investment journey, always research and gather knowledge about what the market experts are doing and how are they planning their investments.

Warren Buffett for instance prefers investing in the business and not in price. He is always on the lookout for stocks that are cheaper than its Intrinsic Value (IV). However, at the same time, he is also focusing on quality stocks for investment and picks the ones that possess the potential to generate value.

According to industry experts, he is focusing on raising his cash pile and this is the reason why he has been able to increasehis personal wealth exponentially from $45 billion in 2008 to $140 billion in 2021. According to Wikipedia, Warren is considered as one of the most successful investors across the globe and has a net worth of over $100.9 billion as of now.

The guide to investment in the stock market

Taking investment-related decisions indeed comes with its fair share of risks. The question of whether to raise cash or wait for stocks to come down at a fair price is the most daunting one!Opting for the latter can leave you stuck and even render losses as when it comes to investment; the right time is always ‘now’.

However, the first and foremost step in the investment process is to identify the stocks that are undervalued and are available at their intrinsic value. Conduct a thorough research and understand the present scenario of the market before investing.

In the present times, the market offers a limited deal. A lot of stocks are floating above their business value and will remain forever. But the key point to be considered is to earn profits from investing. If earnings of stock are increasing and management is greater, then valuations don’t hold much importance in the long term. You need to first check the earnings of the stocks as well as their management quality. Once both the criteria are ticked off from the list, it would be considerably safe to invest in them.

While you are planning to invest, you also need to keep your finances ready. Your financial management should be efficient, strong, and accommodating enough so that you can increasinglyand promptly invest if the right opportunity strikes.

A major point to consider while investing is to develop your investment portfolio which includes both small-cap and mid-cap stocks. When the market is at its prime, having a concentrated portfolio will increase your chances of losing money. This is when having diversity in your stocks would reap you benefits. You can also look at investing in large-cap stocks as they usually tend to be stable during turbulent situations as well.

Summing Up!

The stock market now seems to be reviving and inching towards promising times ahead. Hence, you can look at pooling in your investment with an aim to gain profits in the future. While you are investing, always remember that the stock market is a device to convert money from an impatient individual to a patient investor. It is an important financial decision that should be taken with a calm mind and shouldn’t be done to calm your mind!

The author of this article is Mr. Ankit Yadav, Chartered Wealth Manager (USA), Market Maestroo

The views and opinions expressed are not of IIFL Securities, indiainfoline.com

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