Personal Finance: 10 Tips to get Back to the Market With

PERSONAL FINANCE
10 Tips To Get Back To
The Market With

Lost a truck-load of money betting on the markets? Don't fret. And, more importantly, don't swear off equities either. BT tells you how to play the winning game and recoup your losses.

By Shilpa Nayak

1. Investing Is No Gamble

Even before you start looking up the back pages of the pink dailies, realise one thing: investing and gambling are not the same thing. If it's sheer thrill that you are after, we would recommend the racecourse. The stockmarkets are for serious-minded investors, who are willing to create a robust financial market for good companies. We don't know of any horse that paid a dividend yet. So what about the daily gyrations in stock prices of a company? you ask. That's the result of a calculated game that the big-guns in the market play, as they churn their million-dollar portfolios. You, the small investor, would be ill-advised to ape them. Daily fluctuations are no indication of the stock's fundamental strength, which is something you should go by. And once you've bought a good stock, stay invested-unless you must absolutely sell. Besides, never buy at a stock's peak; snap it up when the others are hammering it.

2. Don't Trade On The News

Stay a mile away from day trading, especially if all that you are relying on to buy and sell is reported news or, worse, rumours. Devastated day traders in the US have been known to take their anger out on their colleagues by gunning them down. Day trading is a specialised cup of tea, best sipped by a person who not just understands the stockmarket's mind, but also the strengths and weaknesses of individual stocks. Day trading is certainly not meant for bored housewives or executives with time on their hand. The internet is a great medium for spreading rumours; only believe in credible sources. Also if it's a great tip that you are getting, there are a million others who haven't just got it, but acted on it, too. Therefore, by the time you decide to buy, the stock price has already factored in that bit of news.

3. Spread Your Portfolio Wisely

Don't put all your eggs in one basket. At any stage in life, be it at the beginning or end of your career, never invest in a single investment vehicle. Spread your investments over equity and debt. Even if you like the rush of equity, avoid over exposure to any one stock or sector. Diversify your mutual fund investments, as also your fixed deposits in banks. Similarly, even if you are sure that a particular stock will rise 50 per cent in another six months, don't bet all your chips on it. The risks of it not appreciating as much are very high, and it will be hard for you to deal with if the turn of events goes against you.

4. Define Your Risk Appetite

You remember the colleague who bought a Maruti Zen from the profits he made on Infosys. But you probably don't remember your neighbour who went broke trading in the Himachals and Global Teles of the world. The point: when you are dreaming of gains, spare a thought for the potential pain, too. Many people tend to invest small sums in third-rate companies, justifying it as an all or nothing play. Beware: there is no such thing as ''money I can afford to lose''. If you set out willing to lose money, chances are you will. Treat your money with more respect, and it will treat you well.

5. Set Reasonable Goals

Stockmarkets are full of get-rich-quick tales. What wide-eyed investors don't realise is that for every one happy story, there are at least a hundred tragedies. Therefore, while it is good to dream of fantastic returns (stock doubling every six months), live by realistic expectations. Set yourself a cut-off point. Tell yourself, ''if the stock gives me a 20 per cent return in a year, I will exit. I don't care if it soars to new highs thereafter''. What you will end up realising is that modest gains (although we dare say 20 per cent is quite immodest) across the portfolio add up to big numbers, whereas a huge drop in a top stock could potentially wipe out your gains. Greed is good, but excessive greed is evil.

6. Know The Company You Keep

All of us pick our friends with care; we want to know where he or she works, where they went to college, whether they are respected at workplace, and whether knowing them will help us professionally or personally. You should treat your portfolio similarly. Investigate your stocks. Start with the management executives: are they people with outstanding trackrecord? Are they known to follow transparent practices? What about the industry it operates in... marketshare? What do customers say about the company? Knowing these will minimise chances of your investment souring.

7. Keep An Eye On Investments

Don't get paranoid, but keep track of your investments at regular intervals. Quarterly results are a good time to take stock of your investments. The company's results should be as projected; if there's a short-fall, find out why. If the reason is minor, don't worry. But if the fall is due to a major product failure, or loss of clients/markets, exit while you still can profitably. Waiting in the hope that things will look up may prove costly. Besides, keeping track helps you figure out if you've reached your earnings goal (remember Tip #5?). These days there are several investment portals, where you can create an online portfolio. You can even get email alerts if the key stocks in your portfolio touch new intra-day lows. There's a ton of information out there; make effective use of it.

8. Don't Cling To Losers

You'd probably earn kudos if you helped a friend through a trough. But there's no medal to be won by staying invested in loser stocks. Which means even if you bought a lousy stock at its peak and it is now quoting way below par, don't hesitate: sell it. If the company shows no signs of a turnaround, then it is better to sell early and minimise the loss. Your money is better off invested elsewhere. You may be able to do little about your nagging spouse; but luckily you can boot a weepy stock whenever you want.

9. Fads Are Fickle

Fashion never lasts for long (dotcommers don't need any reminding). Ask your wife. She reworks her wardrobe according to the latest fashion. That's a great strategy to follow, particularly in investment. Finance and agri-business were in vogue in the early 90s, but then software came and swept investors off their feet. And when the dotmania hit Wall Street, people were bowled over by the promise of the internet. Now that biotech is the buzz, investors are scrambling to get a piece of this sector. Broad industry-linked investment fashions are easy to spot. What's harder to do is pick a winner within a broad industry such as infotech. If you think you don't understand a particular sector or sequence of events, don't hesitate to ask for professional help.

10. When In Doubt, Leave It Out

Despite all the brain-racking, equities still scare the living day lights out of you? Then may be the stockmarket isn't meant for you. Smartness lies in realising that. But if you are reading this magazine, then understanding the nuances of business-or smartness, for that matter-isn't one of your problems. All you probably needed help with is the preceding nine tips. A final word: your long-term goals should determine your investment decisions. For long-term investors, it is always a good time to buy.

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