How To Save Yourself From Getting Into Overvalued Stocks?

Priyanka Sharma

05 Aug 2017

We often hear people saying, “Don’t jump into the market just because others are getting rich. Invest what you can spare after expenses and stay long-term greedy! 

As the famous quote goes, ‘Precaution Is better than cure’ it’s best that we prepare ourselves by examining all our existing investments. One has to be careful while investing in the market.

What are overvalued stocks?
These stocks have a current price which is not justified by its earnings outlook or price/earnings ratio and is expected to drop in price. This may happen due to emotional buying spurts, which in-turn inflates the market price, or from deterioration in the company's financial strength.

How to prevent it?

1) Ensure diversification
Diversification mitigates the impact of market fluctuations on your portfolio by balancing your performers and underperformers. Diversification may preclude whopping gains, but you'll avoid whopping losses. Diversify among asset classes, sectors and geographic regions.

2) Buy bonds 
Bonds provide stability and capital preservation. During a market low, they also fuel your income stream. Although bonds are less risky than stocks, that doesn't mean they're devoid of risk. You need to gauge several types of risk when evaluating bonds, notably interest rate risk.

Interest rate risk accounts for the chance that interest rates will increase in the future, making your bonds less valuable. Your portfolio needs the safety of bonds, and not all bonds get crushed, when market spirals out of control. 

3) Trim your growth stock allocation. 
Credible research studies have found that asset allocation explains nearly 100% of the level of investor returns. At the heart of asset allocation is the risk/return trade-off. Many investors make the mistake of setting their asset allocation just once and then walking away. It's not a one-time task; it's a life-long process of fine-tuning.

If you have just started your career, you could possibly have more of equity and stocks however, if you are nearing retirement, having debt assets more than stocks would provide better security. Thus, tuning your growth stock allocation according to your life goals would be one way of saving yourself from investing in overvalued stocks.

4) Invest in gold
Gold isn't always about the glitter. It also provides a worthy hedge to inflation. The simplest, safest and most cost-effective way to gain exposure to the yellow metal is through the Gold Shares ETF (GLD). Having it as a part of your portfolio would ensure that you don’t get affected as much from overvalued stocks. 

How to find these?
Comparing the company's earnings to its stock price is the easiest way to know which stocks are overvalued. For instance, a company that's trading at a price 10 times its earnings are considered to be trading at a much higher multiple than a company trading at 2 times its earnings. In fact, the company trading at 10 times its earnings is most likely to be overvalued.

There are a lot of strategies that can be considered while making the decision. Make sure to do your own research or seek help from a consultant or investment advisor.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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How To Save Yourself From Getting Into Overvalued Stocks?

Priyanka Sharma

05 Aug 2017

We often hear people saying, “Don’t jump into the market just because others are getting rich. Invest what you can spare after expenses and stay long-term greedy! 

As the famous quote goes, ‘Precaution Is better than cure’ it’s best that we prepare ourselves by examining all our existing investments. One has to be careful while investing in the market.

What are overvalued stocks?
These stocks have a current price which is not justified by its earnings outlook or price/earnings ratio and is expected to drop in price. This may happen due to emotional buying spurts, which in-turn inflates the market price, or from deterioration in the company's financial strength.

How to prevent it?

1) Ensure diversification
Diversification mitigates the impact of market fluctuations on your portfolio by balancing your performers and underperformers. Diversification may preclude whopping gains, but you'll avoid whopping losses. Diversify among asset classes, sectors and geographic regions.

2) Buy bonds 
Bonds provide stability and capital preservation. During a market low, they also fuel your income stream. Although bonds are less risky than stocks, that doesn't mean they're devoid of risk. You need to gauge several types of risk when evaluating bonds, notably interest rate risk.

Interest rate risk accounts for the chance that interest rates will increase in the future, making your bonds less valuable. Your portfolio needs the safety of bonds, and not all bonds get crushed, when market spirals out of control. 

3) Trim your growth stock allocation. 
Credible research studies have found that asset allocation explains nearly 100% of the level of investor returns. At the heart of asset allocation is the risk/return trade-off. Many investors make the mistake of setting their asset allocation just once and then walking away. It's not a one-time task; it's a life-long process of fine-tuning.

If you have just started your career, you could possibly have more of equity and stocks however, if you are nearing retirement, having debt assets more than stocks would provide better security. Thus, tuning your growth stock allocation according to your life goals would be one way of saving yourself from investing in overvalued stocks.

4) Invest in gold
Gold isn't always about the glitter. It also provides a worthy hedge to inflation. The simplest, safest and most cost-effective way to gain exposure to the yellow metal is through the Gold Shares ETF (GLD). Having it as a part of your portfolio would ensure that you don’t get affected as much from overvalued stocks. 

How to find these?
Comparing the company's earnings to its stock price is the easiest way to know which stocks are overvalued. For instance, a company that's trading at a price 10 times its earnings are considered to be trading at a much higher multiple than a company trading at 2 times its earnings. In fact, the company trading at 10 times its earnings is most likely to be overvalued.

There are a lot of strategies that can be considered while making the decision. Make sure to do your own research or seek help from a consultant or investment advisor.

Have Referral Code?