It's a dog's life. More specifically, a Pavlovian dog, perhaps. I bet that's what you'd feel like now, watching the markets see-saw over the past one week. You can almost hear your neighbour — a self-professed market expert — whisper into your ear: you've got to be crazy not to buy! You know he's been proved right in the past: every time the markets have tanked over the past four years, invariably they've bounced back soon enough.
But hang on, what if the prognosis is somewhat different this time round? After all, markets are known to defy trends all the time. What if it takes a long wait for the markets to bounce back? Confused? Well, in times such as these, an old adage is worth remembering: Monkeys become advisors during bull markets and vanish during bear markets, only to show up once again when bulls are back. So, till then, it may make sense for you to figure out a set of thumb rules that could help you navigate the choppy markets:
Get out of leveraged positions
When the markets are high, everybody benefits from leveraged positions. Brokers are always eager to lend funds to investors as they earn interest. Leveraged positions are profitable when the markets are on an upturn. If you have Rs 1,000 to trade and the broker gives you a leverage of two times, you get an additional Rs 1,000 to trade.
But he will charge you an interest of around 15-18% a year for the sum he lends you. For investors to profit from this deal, the market needs to go up by more than 18%. When the market is sliding, it is best to stay out of this game. It is simply too dangerous. If your bet doesn't come off, you'd have no option but to sell stocks to honour your debt commitments.
Income funds begin to look attractive
Consider this: long-term debt funds have given a return of 10.93% over the past one year. Yields on government securities are high, making it the right time to buy debt. Investing in debt funds also provides diversification. More importantly, debt is far less volatile than equity. Thus, when the equity market volatility is historically very high, it makes sense to have exposure to debt funds.
Your age matters
You'd already know this: the current 4-year rally in equity markets has attracted a lot of retired people and homemakers. Some of these folks have made an annual return of around 30% over the past four years. But now, the tide is turning and retired folks have to be a lot more careful about investing in equity.
Generally, it takes a long time for equity to deliver returns and the risks are high. Thus, young investors are better off taking these risks. Consider this thumb rule: 100 less your age will give you an optimum percentage of holding in equity. Thus, if you are 25 years old, 75% of your holdings in equity is fine.
But hang on, what if the prognosis is somewhat different this time round? After all, markets are known to defy trends all the time. What if it takes a long wait for the markets to bounce back? Confused? Well, in times such as these, an old adage is worth remembering: Monkeys become advisors during bull markets and vanish during bear markets, only to show up once again when bulls are back. So, till then, it may make sense for you to figure out a set of thumb rules that could help you navigate the choppy markets:
Get out of leveraged positions
When the markets are high, everybody benefits from leveraged positions. Brokers are always eager to lend funds to investors as they earn interest. Leveraged positions are profitable when the markets are on an upturn. If you have Rs 1,000 to trade and the broker gives you a leverage of two times, you get an additional Rs 1,000 to trade.
But he will charge you an interest of around 15-18% a year for the sum he lends you. For investors to profit from this deal, the market needs to go up by more than 18%. When the market is sliding, it is best to stay out of this game. It is simply too dangerous. If your bet doesn't come off, you'd have no option but to sell stocks to honour your debt commitments.
Income funds begin to look attractive
Consider this: long-term debt funds have given a return of 10.93% over the past one year. Yields on government securities are high, making it the right time to buy debt. Investing in debt funds also provides diversification. More importantly, debt is far less volatile than equity. Thus, when the equity market volatility is historically very high, it makes sense to have exposure to debt funds.
Your age matters
You'd already know this: the current 4-year rally in equity markets has attracted a lot of retired people and homemakers. Some of these folks have made an annual return of around 30% over the past four years. But now, the tide is turning and retired folks have to be a lot more careful about investing in equity.
Generally, it takes a long time for equity to deliver returns and the risks are high. Thus, young investors are better off taking these risks. Consider this thumb rule: 100 less your age will give you an optimum percentage of holding in equity. Thus, if you are 25 years old, 75% of your holdings in equity is fine.
Don't fall in love with your investments
Guard against greed. Remember it is important to book profits at every opportunity. Sell your stock once you have profited from the investment. Sell the stocks where the profits are the highest. In general, if you have doubled your investment then you can sell the profits and make the investment free. Thus, if 10 shares were purchased for Rs 100 and now are trading at Rs 200, then you can always sell five shares at Rs 200 and make your investment free.
Do not time the market
There will be too many advisors who will tell you to invest in the market because the market has fallen. Experts are paid to give advice, but that does not mean that they always come up with the right one. If they are telling you to buy stocks because the market has fallen, they could also be wrong. Thus, invest regularly and use a systematic investment plan. Regular investment is more important than looking for the right time to invest.
Sell your dud investments
There are many cases where stocks that were traded at around Rs 500 have plummeted to Rs 50 or even lower. There are those optimists who hold on to such stocks with the fond hope that they will regain their original values over time. But if the publicly-available information is telling you that there is something fundamentally wrong with the company, it may be best to off-load the stock at any price you can get.
Stick to large-cap funds
It's a simple truth: investing in large-cap funds ensures long-term returns with less volatility. Mid-cap stocks are the quickest to fall in times of high volatility. Over the past one year, the Nifty has risen by 22%, mid-cap by 32% and the Nifty Junior has moved by 37%. Over the past one month, the Nifty fell by 8%, mid-cap by 9% and the Nifty Junior by 11%. Mid-cap and small-cap stocks are very sensitive and when markets rise, they rise the fastest and also are the first to fall in times of volatility.
Value picks aren't always easy to spot
For the past one year, the average price/book value was at 5.7 times. Now, it has fallen to 4.83 times. Investors are now looking for those value stocks that had fallen out of favour. But ratios are not everything. Unless you can give more than 10% of your daily time to follow stock markets, it is better you leave the same job to professionals.
Fundamentals will always be respected
Despite the slide in markets, the Indian economy is strong and the long-term perspective remains positive. Infrastructure and banking sectors remain attractive. So, think about concentrating on these sectors which have fundamental strength and are directly linked to the GDP of the country. Banking funds have given 51% return over the past one year, compared to 23% for the index.
Some investors will always do better than others
Don't get worked up by this fact. Invest for the long term, but do not compare your returns with others. Instead, link your returns with your personal goals.
Guard against greed. Remember it is important to book profits at every opportunity. Sell your stock once you have profited from the investment. Sell the stocks where the profits are the highest. In general, if you have doubled your investment then you can sell the profits and make the investment free. Thus, if 10 shares were purchased for Rs 100 and now are trading at Rs 200, then you can always sell five shares at Rs 200 and make your investment free.
Do not time the market
There will be too many advisors who will tell you to invest in the market because the market has fallen. Experts are paid to give advice, but that does not mean that they always come up with the right one. If they are telling you to buy stocks because the market has fallen, they could also be wrong. Thus, invest regularly and use a systematic investment plan. Regular investment is more important than looking for the right time to invest.
Sell your dud investments
There are many cases where stocks that were traded at around Rs 500 have plummeted to Rs 50 or even lower. There are those optimists who hold on to such stocks with the fond hope that they will regain their original values over time. But if the publicly-available information is telling you that there is something fundamentally wrong with the company, it may be best to off-load the stock at any price you can get.
Stick to large-cap funds
It's a simple truth: investing in large-cap funds ensures long-term returns with less volatility. Mid-cap stocks are the quickest to fall in times of high volatility. Over the past one year, the Nifty has risen by 22%, mid-cap by 32% and the Nifty Junior has moved by 37%. Over the past one month, the Nifty fell by 8%, mid-cap by 9% and the Nifty Junior by 11%. Mid-cap and small-cap stocks are very sensitive and when markets rise, they rise the fastest and also are the first to fall in times of volatility.
Value picks aren't always easy to spot
For the past one year, the average price/book value was at 5.7 times. Now, it has fallen to 4.83 times. Investors are now looking for those value stocks that had fallen out of favour. But ratios are not everything. Unless you can give more than 10% of your daily time to follow stock markets, it is better you leave the same job to professionals.
Fundamentals will always be respected
Despite the slide in markets, the Indian economy is strong and the long-term perspective remains positive. Infrastructure and banking sectors remain attractive. So, think about concentrating on these sectors which have fundamental strength and are directly linked to the GDP of the country. Banking funds have given 51% return over the past one year, compared to 23% for the index.
Some investors will always do better than others
Don't get worked up by this fact. Invest for the long term, but do not compare your returns with others. Instead, link your returns with your personal goals.
Source: ET
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