To succeed in the stock market on a long term basis you must set a limit to your ambition by hedging your gains suitably.
Some tips are:
- Have a realistic profit goal and start selling once your goal is achieved.
- Do not aim to sell at peak levels. You do not know what the peak price is until it starts sliding.
- Do not switch to junk stocks. These increase the risk of your portfolio dramatically.
- Switch to bonds with a good credit rating at an appropriate time.
Macro decisions:
- Is it the opportune time for equity investments? There are always booms and slumps, one should invest at the end of a slump and quit before the end of a boom
- Is there a particular industry or institution worth investing in at a certain time? There are “sunrise industries” such as, IT, Electronics, Pharmaceuticals, FMG, Petroleum, Transport, Banking, Housing and Real Estate. Examples of sunset industries include Jute.
- Possible long term gains can be seen in Wind, Solar, Bio-fuel energy companies and those involved in providing infrastructure.
- Differentiation can also made in terms of capital intensive industries (petroleum) and labour intensive industries (textiles).
- It is advisable to develop a good insight to the broad economics of industries and choose the right types.
Micro decisions:
- Choose the right company(ies) based on financial criteria, balance sheet analysis and non-financial areas such as management, reputation and track record.
- Decide on the right price as to whether it is attractive in the current market. The intrinsic worth of a share is assessed through a detailed analysis of a balance sheet
- Prudent investors will not put all their money in one or two scrips because the risk of such a concentration is too high. On the other hand if one diversifies too much the average performance of your portfolio will be mediocre. One has to strike a balance between the two. The portfolio should be reviewed periodically, shuffled and properly managed.
- Products coming from industries such as Telecoms, Cement, Steel, Aluminium, Engineering, Pharmaceuticals, Commercial vehicles, Petroleum products, Tourism, Hotels and domestic vehicles will be in demand with increasing urbanization. Companies which make products of mass consumption at low prices continue to do very well with the increasing population and the subsequent higher demand. It is advisable to watch the trend in consumption pattern of middle and lower middle class sectors and decide your options accordingly.
- Some sectors which are likely to struggle are Alloy Steel, Consumer Electronics, Textiles, Nylon and the Plastic Industries. Others are season specific and can fluctuate like gold , silver and silk and it is wiser to avoid these.
Mutual Funds:
The Mutual Fund industry has grown very rapidly with most of the established, reputed and well known companies, institutions and organizations floating Mutual Fund Divisions. They pool the savings of a large number of individuals and invest them in well researched stocks and portfolios.
- The investors employ the expertise of money mangers who mange their fund portfolio and decide when to buy and what to sell. Therefore this is a good alternative to ones self handling the share market.
- The risk is spread as the investment is both in equity and fixed incomes and tailor-made to the needs of the investor.
- The individual investor is also saved from the bother of chores such as ensuring the safe control of shares and encashing dividend warrants. Also if desired, the gains can be automatically reinvested which an individual investor is unlikely to do.
- Select a fund which permits the manager to switch from equity to bonds and vice versa depending upon the market.
- Do not panic if the fund’s quoted price does not change over a period.
- Study the performance of the fund in both bullish and bearish market conditions.
- Large funds are unlikely to beat the market average, but they are more consistent in their performance.
- Small funds can be nimble in he market and score higher gains when conditions are favorable, but such conditions are unlikely to happen every year.
- To avoid tax, buy shares in funds immediately after dividend is distributed, not before.
- Plan your investments on a regular or even monthly basis from the savings from your early years of employment. This principle of compounding will work favourably to your advantage.
- Do not put all your money in the same fund. Plan a manageable diversified portfolio.
- Do not invest heavily in one specific sector- the risk factor is high.
- Stay invested in Mutual Funds. Do not try and predict which stock or bond market will do better.
- Rebuild your fund portfolio. Throw in a few diversified equity funds for growth options, add a dash of specialty funds, an index fund, a PE fund, or a debt fund.
- Continuously monitor your fund’s performance. The risk that you are willing to take should primarily be based on your needs for fund generation and appreciation and how much you want your funds to earn over a period (say, 3 to 5 years). Think, take expert advice before you decide.
Tags: investment, money, mutual funds, stocks
