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Rediff.com  » Getahead » Protect yourself from bad stock market advice

Protect yourself from bad stock market advice

Last updated on: February 15, 2011 10:40 IST


Photographs: Rediff Archive Sheetal Jhaveri

Scams, breakdown of governance, rising prices, inflation, slowing foreign direct investments, rising interest rates, commodity prices and crude oil are some of the threats intimidating India's growth story.

With Sensex having tanked to 17,500 levels, the mood is turning from bad to worse. To top it all if some bad investment advice from some self-appointed genius comes your way, well what to say -- it's like a last nail in the coffin!

Listed hereare some of the investment advices related to stock markets which should be given proper thought before betting your money on them.

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The author is a certified financial planner and can be reached at dhanplanner@rediffmail.com.

Protect yourself from bad stock market advice


Markets are not doing that great so it's not a good time to invest

In fact this is what an experienced investor would be saying right now: I am getting great deals on the stocks of my choice so why not buy them now with a medium to long term horizon as the prices are expected to go up when markets go up.

In fact this is what experienced investors did in last rally.

If the company in which you are planning to invest is fundamentally strong then one should invest bearing in mind medium to long-term view.

At 21,000 level investors were crying that valuation of the stocks are so high that it's not worth buying at this rate. But now in a falling market all you get are bearish views. What you need to do in an uncertain volatile market is either opt for systematic investment plan (SIP) way of mutual funds where there is no need to track the market or time them.

In fact more volatile the market, the better the SIP works as it averages out the cost in long run.

Protect yourself from bad stock market advice


Also in a falling market, one should be happy as you are gathering more number of units and when the markets rise they immediately start showing profits.

Or if you have say Rs 2 lakh to invest but are still not sure then the best way is to invest part by part over a period of time so as to capture the volatility in the market. This route would be best suitable for individuals who follow the markets every day.

The obvious question in everyone's mind would be: How do we know if the markets will go up or further down from this level? Well no one knows for sure.

Even experts always say that they are predicting not forecasting.

One has to check the general macroeconomic scenario, the market sentiments, and industry outlook before initiating a trade on the buy side. Just as in our current scenario, the markets are predicted to find support at the 16,000-level and not go down further. Also markets are expected to move broadly in this range because an important event like the budget is coming up at the end of the month.

Do remember to enter stock markets only if you are a long-term investor with a capacity to hold.

Protect yourself from bad stock market advice


My investment in this company is a sure shot profit

I am sure most of you have burned your fingers by investing on 'Tips'. Whatever be the source of your advice, do not forget to ask certain basic questions before even considering investing your hard money.

Questions like:

  • What is the business of the company?
  • What are the growth prospects of the company and the sector?
  • Is it a long-term investment or short term?
  • What are the chances of the business of the company going wrong?
  • Who are the promoters of the company?

And always know the general outlook of the economy. If the advice has come from a self-proclaimed expert neighbour or friend then please be extra careful before jumping in. In the current scenario, I am sure many of you are on the lookout for companies that can give profits. Do remember again invest in stock markets only if you are a long term investor with holding capacity and are willing to take risks.

Also fix a downside on your investments and set strict stop losses.

Protect yourself from bad stock market advice


I made Rs 10,000 today in the stock market and so can you

And your eyes pop out. You would also want to join the gang and make some easy money. What you need to check with them is 'Is the value just on paper or is it actual realised profit?'

If your gain is only on paper you haven't gained any money. Long term investors should not be worrying about cyclical declines in the stock markets as they are in for the long haul and with good investments you will have enough opportunities to book profits.

In fact there are certain stocks which are fundamentally so strong that investors holding on for the long term reap huge profits even to the tune of 200 percent or more. 

And if the current tax laws remain unchanged, then there is no long-term capital gain on the profits on shares. Portfolio values fluctuate constantly but gains and losses are not realised until you act upon fluctuations.

Protect yourself from bad stock market advice


I am not affected by the current fall in the markets because I have a well-diversified portfolio

Diversification of a portfolio means diversification in different asset classes. Also, over diversification in one asset class is not good. Although you own 50 stocks but it is a fact that beyond 20 stocks, your risk does not get diversified or diluted any further.

Even if you have a limited number of stocks but if all stocks are of the same sector then too your purpose is not served. One more thing if you have 50 stocks but just 5 shares or 10 shares of each script it proves to be an expensive proposition because every time you buy or sell you are charged brokerage and also demat charges for holding the stocks in your demat account and you do not see your profits till there is a substantial increase in the value of the stock over and above the purchase value plus these extra charges.

So holding 50 stocks or more is not diversification. Yes your stock portfolio can be said spread out but again bear in mind the above points. Diversification is appropriate asset allocation of your portfolio in different asset classes based on your goals.

Protect yourself from bad stock market advice


You need to be an active trader to beat the markets

Well not true. Many a times you hear individuals saying that their portfolio manager suggest and actively trades his portfolio. Well active trading can prove expensive because every transaction costs money.

Also at times just the compulsion to trade can have you end up making losses. Many a times the portfolio manager just to earn more commission can be mismanaging the portfolio. For active trading you need to watch the markets on a daily basis and follow them with technical and fundamental expertise which not all of us have.

Hence, for individuals who do not have the time or the expertise, SIP in any good equity diversified fund is the best route for investments in stock markets as you have a disciplined approach of investments and are investing in all markets, be it bear or bull.

For individuals who would themselves like to trade, please do not actively trade your entire portfolio but keep just 20 to 25 percent of your portfolio for active trading and rest invest in good fundamental stocks for long term.

This way you are taking part in the market but at the same time restricting your cost and losses. Also, remember that for investors who invest in equity mutual funds, it is not advisable to buy or sell funds like one would do with stocks since it can be very expensive as well as not worth the efforts.

Remember in stock markets listen to everyone but follow experts' opinion with your own research and be in for the long haul.