Skip to main content

Seven things to remember in any bear run

 

The year 2008 was a unkind to investors so far. Many have suffered huge losses. It's worth reminding ourselves of basic lessons that every retail investor ought to keep in mind to avoid, or at least minimise, losses in one's portfolio.

1. High rewards don't come without taking high risk.

During a bull market, retail investors get taken in by the rise in the stock market. They don't want to be left out. So, they rush in and buy in an indiscriminate way, without realising that they might be taking on too much risk. Remember, if you chase high returns, high risk will follow you. Let's take the example of publicly-listed real estate sector in India. The industry has a very favourable long-term future. However, the rapid rise in the sector's stock prices over the past year made a short-term investment in these stocks a risky bet. As it turns out, the risks have been borne out and this sector has collapsed spectacularly. Understand your own risk profile and how you emotionally deal with volatility in stock prices.

2. Understand what you own — don't always rely on the latest tip or prediction.

If you knew the secret location to some buried treasure, would you share it with others around you? If someone really has a hot tip on an investment that is going to earn high returns, always ask why they are sharing it with you. In today's wired world, it is possible even for retail investors to understand, even if in basic ways, what is it that you are about to invest in — what does the company do, who its customers are, is the company profitable and so on. You must form your own view about the company's prospects. Stay away from fast risers. The more you understand investments that you have made, the more confident you will become.

3. Leverage is a double-edged sword that can destroy you in falling markets.

The recent collapse of various hedge funds and banks has shown that living on borrowed money can be dangerous. During good times, leverage can amplify your returns. But in rough times, it can kill you. Currently, even the world's best risk managers on Wall Street are having a tough time dealing with their leveraged exposure to markets. Be careful about making investments using leverage. Remember, nobody is going to flash an emergency light announcing the arrival of the next crisis.

4. Keep some of your powder dry — you don't always need to be fully invested.

This is where the professionals really distinguish themselves from amateur retail investors, because they keep some cash available to take advantage of falling prices. Professionals think of a correction in stock prices as a sale in stocks. But to benefit from these sales, they keep some cash ready. They don't feel the need to be fully invested all the time. If you use up all your cash to make your investments, you will never be able to take advantage of the cut price sales that will happen in times of severe correction like now. Corrections occur periodically — be prepared to take advantage of these situations.

5. Build portfolio on a strong foundation.

Just like you cannot build a house on a weak foundation, your stock portfolio also needs to be built on the back of strong companies and predictable stability. The more junk you have and poor quality stocks you own, the quicker your portfolio will also collapse during a correction. Weak companies with unfavourable long-term business prospects, weak balance sheets and poor operating performance might look tempting as they promise short-term growth. They may go up faster than the market in a bull phase, but come racing down at the slightest evidence of any stock market trouble. Build your portfolio on the back of stable, blue-chip companies that have long track records of success across economic conditions.

6. Keep a wish list of companies.

Smart investors keep a wish list of companies whose shares they want to buy when the opportunity and price are right. Corrections will give you the opportunity to pick through names. But, like we said in point 4 above, you need to have some dry powder to be able to add your wish list to your portfolio. Warren Buffett has been known to keep his eye on his wish list companies for decades before he finally finds a good entry point for an investment.

7. Invest for the long-term.

Serious investors put money to work for the long-term. They don't get distracted by seasonal or cyclical fads, or get caught up in short-term performance. Don't day trade, and especially not on margin. For every day trader who wins, there is another trader on the other side of the trade who has lost. In this speculative game, its likely that you will on average have as many bad days as good days. If you invest for the long-term, you will be less affected by all the noise in the market that will clutter your thinking and cause you to make impulsive and short-sighted decisions. You will also avoid the tax liability associated with short-term trading that can add more complexity to your finances.

It is never too late for serious investors who want to build long-term wealth to learn and apply the above lessons. With a little bit of discipline, your portfolio too can survive any stock market correction and achieve excellent long-term performance.

 

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now