7 lessons for investors as stock market rallies

In case you have missed the bus again -- like retail investors in the stock markets often do -- here's what you must keep in mind even as the stock market rally continues.

The stock market had tanked heavily in the year 2011, losing more than one-fourth of the valuation in the biggest yearly plunge since 2008 and the second-biggest loss ever.
The benchmark Sensex had also lost about 5,054 points last year and stood at 15,454.92 points as on December 31, 2011.

Barely one and a half months into the New Year, the stock market has made investors richer by more than Rs 10 lakh crore on the back of a smart pull-back rally since the beginning of 2012. In the process, the stock market has recovered more than half of the losses suffered during the entire year in 2011. About twenty stocks listed on the NSE have, in fact, already doubled from their values on New Year's eve.

The Indian indices as on February 17, 2012 completed seventh straight weekly positive close for the markets with Sensex mustering gains to the extent of 18 per cent during the course of the year. Positive global sentiments have infused liquidity and increased the risk appetite of the investors. The current rally is mostly driven by the improved sentiment over strong liquidity support from overseas investors. The current rally has been broad-based, with shares of realty and infrastructure companies leading the gains.

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Courtesy: Investment-mantra.in

Retail investors caught by surprise?

Amongst this stock market rally which surprised most investors, retail investors, as it has happened on numerous times in the past, were caught unaware and at the time when most of them stopped SIP last year fearing further stock market crash and liquidated their investments. Now that the stock market has rallied sharply over a month and half, they are left wondering if to invest now or not.

Normally when such kind of rally happens wherein almost all beaten down stocks/sectors get involved in a steep rally, retail investors tend to take this as another opportunity lost. Market will anyways always surprise you with its moves -- both on upside and on downside. So what can a retail investor do in such market conditions?

We bring forward to our readers simple mantra as to not get perturbed by stock market crash or get excited by sudden spike and look to create long term wealth by investing regularly in accordance with your goals.

1. Continue investing through systematic investment plans (SIP) for your long-term goals

If you are investing in a diversified mutual fund with a proven track record for a goal which is 10 to 15 years away or more, don't get rattled by current stock market volatility. Keep investing through SIP to get benefit of averaging and compounding.

Don't stop your SIP's when the stock market tanks. By doing so, you are defeating the concept behind systematic investment plan.

Make a strong core portfolio of diversified funds and keep investing. You will definitely stand to gain in the long run. Have confidence in your investments.

2. Stay invested for reasonable amount of time

Stay invested for a reasonably long period in accordance with your goals. An upward trend will always be followed by a downward trend but you cannot time the market. So keep you expectations reasonable and don't be greedy.

Some investors argue that price movement is not always dictated by fundamentals but more often than not if the company you are investing in doesn't have strong fundamentals, progressive management, strong balance sheet, strong outlook and growth potential, it won't last the full distance. This fact holds lot more significance for small investors who have very less space for making an error.

3. Study the company carefully before investing

Invest in stocks of only established companies with strong fundamentals, having good management/promoters having good reputation. Understand the business of the company you are investing in, and keep track of news which may influence the business of the company, for example, any government policy regarding, excise & taxation, import/export duties, raw material availability or price fluctuations etc.

Evaluate your risk profile before investing and look for investing in companies with good cash flows, no debt and good growth outlook.

4. Invest according to your risk profile

Invest according to your risk profile and goals and don't try to mimic your friend's/relative's financial portfolio. His/her risk taking capacity, investment goals may vary from yours. So what holds true for him/her won't necessarily hold true for you too.

Driven by greed and the thought of making fast money, investors tend to follow their friends or tips from their brokers to invest without paying much attention to the fundamentals of the stocks.

5. Resistance to book loss on poor quality stocks

Due to lack of discipline to cut losses, more often than not, investors find themselves holding on to a lot of poor quality stocks when the market collapses to a very low level. Majority of retail investors do buy a mixture of good and poor quality stocks. However, they tend to hold on to poor quality stocks and sell the good ones when the stock market collapses.

This is because when the stock market crashes, poor quality stocks will drop much faster than good fundamental stocks.

Most retail investors find it difficult to sell poor quality stocks as the stocks may drop far lower to their buying prices within a short period of time. As retail investors refuse to admit their mistakes, they will hold on to these stocks, hoping to break even again in the future. Unfortunately, they overlook one important market saying, which is: What goes up may come down, what goes down may never go up.

6. Look beyond FDs as part of fixed income allocation

As for the investors interested in investing in debt instruments, look beyond traditional fixed deposits (FDs) as part of your debt fund allocation. Yes, you can definitely have some proportion of funds allocated to FDs but do take out some time to read about other debt instruments and how they fare in comparison to FDs, especially the taxation aspect.

Till you get to know about such products, it is impossible for you to take benefit of them. The debt instruments covering a range of risk and returns are a good investment option. They can earn better than FDs. Now large number of retail investors have access to quite a few debt instruments covering a considerably wide range of risks and returns.

7. Keep your tax planning simple and in line with your goals

As for tax planning aspect, make sure you do your tax planning at the beginning of the year only and don't fall prey to agents who sell you wrong products at fag end of the year when you are desperate to invest to save tax.

Always try to view your investments in tax saving instruments from the perspective of returns too and wherein they fit in your overall financial portfolio. It is always encouraged everyone including youngsters to invest in tax saving mutual funds, Public Provident Fund (PPF) as part of their tax planning than expensive insurance policies.

Conclusion

Some retail investors believe they can make quick money from the stock market. They believe that investing in the stock market is one of the best ways to accumulate wealth in a short period of time. However, due to lack of proper financial training, investing knowledge and intelligence; they always find themselves at the losing end. When they are excited about investing, the stock market may be nearing to the peak.

On the other hand, when they are suffering losses, losing patience about investing and intending to cut their losses in the stock market, the market may be touching the bottom, and that, in fact, is supposed to be the best time to invest.