It not only requires oodles of patience and discipline, but also a great deal of research and a sound understanding of the market, among others.
Added to this is the fact that stock market volatility in last few months has left investors in a state of confusion. They are in a dilemma whether to invest, hold or sell in such markets.
Although no sure-shot formula has yet been discovered for stock market success, here are some tips to help you emerge a winner:
Have oodles of patience and discipline
Historically it has been witnessed that even great bull runs have shown bouts of panic moments.
The volatility witnessed in the markets has inevitably made investors lose money despite the great Bull Run.
Still “investors who put in money systematically, in the right shares and held on to their investments patiently can look towards generating good returns,” says Ashsih Kapur, CEO, Invest Shoppe India Ltd.
Hence, it is prudent to have patience, besides keeping a long-term broad picture in mind.
Research the stocks before buying
Do not always rely on tips and also avoid having the herd mentality. It has been witnessed that the typical buyer’s decision is heavily influenced by the actions of his acquaintances, neighbours or relatives.
Thus, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same.
Therefore, try to look investing in solid, large, blue chip companies and buying undervalued stocks based on fundamental analysis. Short-term investors can put their money based on news and technical analysis.
Before buying the stock, one must decide a price target that one is comfortable with and a stop loss to avoid great losses, if the price goes down.
Investors should not look what the short-term state of the markets is, rather should see what are their financial goals in life.
Depending upon the time horizon of goals, short term, medium term and long term; investments should be made accordingly.
“It is a proven fact that in the long run, equity is the highest return-generating asset class. Therefore, for your long-term goals, without any hesitation, invest in equities either through stocks or through mutual funds,” advises Ramesh Dalal, vice president, Bajaj Capital.
. According to him, for short-term and medium-term goals, much exposure to equities is not recommended even if the markets are stable.
Diversification is the key
Diversification of portfolio across asset classes and instruments is the key factor to earn optimum returns on investments with minimum risk. The reason for the relatively poor performance of portfolios of individual investors even in greatest of bull runs has been lots of variation in market breadth. Different industries have participated at different points of time in taking the markets up.
There have been periods running into several months when the entire rally has been led by a handful of large, frontline stocks. On other occasions, mid caps have generated remarkable returns and made large caps look pale in comparison. So, it becomes imperative to diversify your portfolio across sectors and market capitalization.
Many investors have been losing money in stock markets due to their inability to control greed and fear. In a bull market, the lure of quick wealth is difficult to resist.
Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time.
“This leads them to speculate, buy shares of unknown companies or create heavy positions in the futures segment without really understanding the risks involved,” says Kapur.
Instead of creating wealth, these investors thus burn their fingers very badly the moment the sentiment in the market reverses. In a bear market, investors panic and sell their shares at rock bottom prices.
Market related capital protection schemes
Capital protection schemes from mutual funds and life insurance schemes can be a lucrative option in these fluctuating markets as these schemes give you an opportunity to create wealth by participating in the stock markets along with a guarantee of capital protection.
Invest in a staggered manner
Instead of making one time lump-sum investment in current markets, investors should go for staggered investments through systematic investment plans (SIP) of mutual funds.
“Systematic investments reduce the risk of your portfolio by averaging the purchase price per unit,” says Dalal.
Switch to defensive sectors
Those who are already invested in the stock markets need to have some patience and better switch to the defensive sectors like FMCG, pharmaceuticals, consumer durables and telecom.
Arbitrage funds and gold funds are other options available.
Have realistic expectations
There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions.
For instance, lots of stocks have generated more than 50 per cent returns during the great bull run of recent years.
However, it doesn’t mean that you should always expect the same kind of return from the stock markets.
Therefore, when Warren Buffett says that earning more than 12 per cent in stock is pure dumb luck and you laugh at it, you’re surely in for a trouble!
Don’t time the market
One thing that Warren Buffett doesn’t do is try to time the stock market, although he does have a very strong view on the price levels appropriate to individual shares.
A majority of investors, however, do just the opposite, something that financial planners are always warning them to avoid.
For market timing to be an effective investment strategy, “you need to have a 70 per cent accuracy rate or better,” says global financial expert Ted Cadsby.
That is what makes it virtually impossible. But, sadly, a good number of investors are yet to see any merit in Cadsby’s advice.
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