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Home > India > Business > Special


Buying stocks? Follow these 4 steps

Amar Pandit in Mumbai | March 11, 2008

Once you have done the hard work of accumulating a nice little kitty for yourself, rebalance the portfolio in favour of safer instruments to be insulated from market risks.

Anil Shah, a businessman in his late fifties, is a seasoned investor. He has been rather successful in his investment strategies for the past few years.

The result: a good corpus both for the family and his business venture. In fact, he is in a financial situation where he can look at "safety-first" instruments to park his wealth and retire.

However, there is an uncanny knack among many of those, who create wealth through stock markets, to continue playing the game.

The heady mix of picking a winner and making money on it is something many successful investors want to continue to achieve. And this need often, leads to their peril.

Shah is no exception. Having tasted blood in the stock markets, he is very happy investing in a bull market and make quick bucks.

Conversely, ask him about his five to ten year investments in the markets and he is quick to say, "I am not interested in equities for that long."

The basic idea is to make money in bull markets and staying away from market in bearish phases.

By January 20, 2008, Shah had built a portfolio of Rs 10 crore (Rs 100 million), from a mere Rs 50 lakh (RS 5 million) portfolio in 2001. This was achieved through aggressive investment in the futures market. And even on January 21, his exposure was entirely in the futures market. However, in the next few days, the markets crashed. His portfolio now: just at Rs 4 crore (Rs 40 million).

Seven years of astute stock picking and taking risks had completely gone down the drain for Shah: a common phenomenon when greed takes over and the focus is purely on maximising returns.

A lot of investors in the equity market are not happy with decent returns (as can be expected from any stock in the long run) and go too aggressive. What gets overlooked in this pursuit is the excessive risk that you expose your overall wealth too.

So what should be done when you have accumulated sufficient wealth to address your goals? - the answer surely will be different in different stages of life. But it's important to put a number to it at some stage in life and once you have achieved it, take the following measures:

Avoid costly mistakes: Stay away from risky offerings, whether it is futures or commodity trading, and for that matter, trading in general.

Understand equities as an asset class: Any promise of more than 15 per cent, based on past performance, should be seen with a lot of caution. Higher the returns, more the risk. However, considering the current level of the market pessimism, one could probably make higher returns of between 12 per cent and 15 per cent, but only in the long term (10 year to 20 year timeframe).

Firstly, you should accumulate a certain level of wealth, based on your goals, liquidity needs, current income and time horizon. Once you have achieved that, it's time you balance your asset allocation and move to instruments that will give lower returns but keep you investments safe. Besides keeping your money safe, it will also make sure that you sleep  omfortably in turbulent markets. Also, have patience with the part of the wealth that you are playing the market with. If there is a 30 per cent slide, there is no real cause of concern.  Equity investors must realise that such downturns are a part of the capital markets. However, if your portfolio is down 50 per cent or more, take a re-look at your overall
investment strategy.

Keep only a small percentage of your portfolio in high-risk high returns kind of transactions, but only if you have the stomach for constant fluctuations.

Old hands in the market would tell you that the pain caused during the Harshad Mehta regime  and more recently, the Ketan Parekh times when investors went the whole hog by investing their lives' savings in the market for a quick buck, only to find them completely wiped away in the days to come.

Many, however, have the tendency to forget the pain cause by the last fall, and would participate in the next rally with renewed energy. It is important for such investors to remember that before they take that plunge, a proper asset allocation should be done.

Follow these two simple, yet cardinal rules while investing, "make as few mistakes as possible" and "control your greed and fear" and you will not be disappointed. It's not just about your investments but it is also about you. More than your investments, its how you behave in bullish and bearish markets that will determine where you end up several years from now.

The writer is director, MyFinancial Advisor.



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