Sensex at 20000 – what should small investors do now?

It finally happened. The Sensex broke above the 20000 level intra-day, quickly fell below, then played hide-and-seek the rest of the trading day before closing at 20001. A level last seen 32 months ago.

What is special about the level of 20000? Nothing, really. It is just a nice round number. In the good old days of the Indian stock market, shares had to be traded in lots of 50 or 100. Now, one can buy a single share. Or, 37. Or, 169. But most people still tend to buy 200 shares or 500 shares at a time. The human mind likes nice round numbers.

If that be the case, should small investors be bothered at all? Let us listen to some expert-speak, courtesy moneycontrol.com:

• Ramesh Damani said the Sensex may consolidate for a while before heading to new highs, and advised investors to enter the market even at current levels.
• Daryl Guppy thinks the Sensex may hit 21000 and then drop to 19000; that will give a better entry point.
• Adrian Mowat is bullish about the India growth story and considers the 20000 level a wake-up call for domestic investors who haven’t participated in the market.

Three out of three – all bullish. Should small investors dive into this market then? It depends what kind of a small investor you are. Let me try to segment the small investor population.

1. You are a ‘new’ investor who wants to join the bull party now – Don’t. The party has been going on for 18 months. All the ‘free’ food and drinks are finished. You may have to pay dearly for this late entry. Start a monthly SIP into an index fund/ETF and continue the SIP for several years through bull and bear cycles. In the meantime, read and learn as much as you can about the stock market and how to build long-term wealth slowly and surely.
2. You are an investor who got ‘burned’ badly during the 2008 bear market, and stayed away from this bull rally – Continue to stay away. Follow SIP advice given above.
3. You are an investor who lost a lot in 2008, but remained invested and bought some more and have just started to see some profit in your portfolio – Use this opportunity to churn your portfolio by getting rid of the non-performers. Hang on to the stocks that have performed well, or, book part profits and shift the cash to fixed income funds. Use a 10-15% likely correction to add.
4. You were lucky to enter the market in April/May 2009 and have good profits in the stocks that you still hold, but you haven’t been through a bear market yet – Book partial profits and shift the cash to fixed income funds. Use any correction to add.
5. You are a more seasoned investor who has been through the previous bull/bear cycle and emerged with a much stronger portfolio and a more balanced attitude towards the market – Stick to your asset allocation plan and book profits only to rebalance your asset allocation. Stay invested with trailing stop-losses.
6. You are a long-term investor with a strong portfolio and experience of several bull/bear cycles – Hope you are reading this for entertainment value, because you don’t need any advice from me!

Have I missed any one? If you are one of those who can’t fit into any of the six categories mentioned above, drop me a ‘comment’.