Following own rule while investing in equities 'suicidal'

A couple of years ago, hopes were high that a large chunk of household savings, which account for nearly two-third of all domestic savings in India, will find its way to the stock market through mutual funds, insurance companies and banks.
Investments in shares and debentures by households grew at a rate of 149% a year during FY 2005-07 as mutual funds and unit-linked insurance policies made rapid inroads in urban India. In FY08 the stock market absorbed nearly 12% of all household savings in India, up from less than 1% in FY04.

The basic rule for investment in equities is to buy securities when the equity market is falling. But every time the market crashes,retail investors rush out of the market, creating a stampede and hurting themselves so badly that many wouldn’t want to return ever. This gives equities a bad name and restricts the upside potential for retail investors.
Take the case of the market turmoil in Jan’ 08 and the free fall since then. This induced individual investors to flee to the safety of traditional investment avenues like bank deposits, insurance polices and cash and household savings in shares and debentures declined by 78% in FY09 against the average growth of 71.5% in previous three years. But actually they had missed a golden opportunity.
The Sensex had stabilised at around 8000 in November 2008 and hovered around this level till mid-March .

The signs of recovery and improved global liquidity reversed the trend in equity market to northward since mid-March ’09. The Sensex nearly doubled in less than six months. And guess what, retail investors are back in Dalal Street. The rising retail participation is evident from the rising assets under management of the equity mutual funds, which have grown from Rs 1,01,000 crore in Feb ’09 to Rs 1,81,000 crore by the end of Aug ’09.
But now, most of stocks comprising Sensex and Nifty have nearly doubled in the last six months and their valuations look stretched. Obviously, with each rise in the market, the chances of making a loss is higher than making a gain. In contrast, during the 2008 meltdown, the chances of a bottoming out was greater than a further fall.

So, if one decides to enter the equity market now, the returns are likely to be at best modest given the fact that most stocks are near their year highs while some have touched all time highs.
Then there are concerns on account of underlying inflationary pressure and a strong likelihood of a monetary tightening by the central bank. This may drag the equity markets down. If this happens, retail investors may book a loss and equities will again get a bad name.
Investors should not forget that booms and busts cycles are an integral part of equity markets and if one plays these cycles smartly, she can generate long-term wealth and prosperity. Big corrections are actually a buying opportunity.

Source: http://economictimes.indiatimes.com/quickiearticleshow/5007798.cms