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Portfolio: Long term strategy good in correction phase

Go for value stocks when the market is in a correction mode



The last few years have been remarkable in the history of the domestic stock markets. They have given 40 to 50 percent returns year-on-year in the last 3-4 years. Investments in market instruments have given more than the expected returns from the last five years. But a correction phase has started from the beginning of this calendar year - 2008. This correction in the markets - all over the world in fact - was triggered by news related to the global economic slowdown triggered by the US recession. Also, there has been a tremendous amount of intraday and short-term volatility in the domestic markets. Volatility indicates the amount of price fluctuations in the market movements. The higher the volatility, the riskier it is to invest in the short term. However, medium to long term investors should not worry much about volatility as the economic and corporate fundamentals matter over the long term.



Fundamentals of the Indian corporate sector and economy remain healthy from a long-term perspective. According to some data released by the Reserve Bank of India (RBI) recently, the industrial and credit growth in the retail segment has come down a bit, but from a broad perspective, there no major change in the fundamental story of the economy. As per the RBI projection, the economy will grow by a healthy rate of around eight to 8.5 percent this year. This could be slightly lower than last year's growth, but otherwise India would continue to be the second fastest growing economy in the world, after China.



Here are some basic guidelines investors can follow while identifying and picking stocks to build or reshuffle an equity portfolio:



i) Choose Stocks with Potential



Identify fundamentally good stocks based on your investment objectives. You can take advice from your stock broker to identify stocks for your portfolio. Usually, it is recommended to identify 5-8 stocks for an individual portfolio. Diversify your stock portfolio by investing in multiple sectors (steel, auto, banking, energy, pharma, FMCG etc).



ii) Go for Safe Sectors



It is always noticed that there are some sectors that are highly volatile in the markets (hence high risk against returns) and others are quite stable. Balance your portfolio by investing in momentum as well as stable stocks. It is always advisable to invest in large-caps or selected mid-caps only. Small investors should avoid investing in small-cap stocks.



iii) Stay Invested



Do not panic during the volatile market moves. Use this volatility to enter into your identified scripts or exit from your positions slowly and gradually. Pick your stocks slowly by accumulating the stocks in small quantities at every buying opportunity (dip) in the market. Don't hurry to invest your full corpus at one go.



Historically, investment in stock markets gives better return over the long term but your percentage gains largely depends on your stock selection and your entry price into the stock. Therefore, it is advisable to transact in small quantities. Smaller transactions help in averaging your entry or exit price.



iv) Plan for long term



Invest with a long-term horizon in mind. Don't try to trade in the market (buy today, sell tomorrow). Keep in mind that trading in market involves transaction costs.



Always have a profit/loss target in mind. Once the profit/loss target is achieved, analyze your investments and decide (book profit, book part profit, book loss, book part loss, revise the target) based on a sound analysis. Often, investors fall into a trap by not booking profit/loss once the target is achieved.



Trading in the stock market is an active investment strategy. You have to keep a constant watch on your stock market investments (at least once 2-3 days). If you cannot afford to do that, you will be better off investing in mutual funds with a good track record of outperforming the markets.







Staying afloat in turbulent times



You can use a stock market crash to buy fundamentally good stocks.



These are volatile times. The movement of the stock index is erratic and at most times unexplainable. At times, there could be promising upward sways and at other times, disheartening falls. While some investors have made lot of money, many others have lost tons of it in the market. Those who burnt their fingers keep away from the market in volatile times. Then there are novices who feel that the market is not a safe place to lock their money. They simply abstain from it looking for safer investment alternatives. Be it a seasoned investor or a novice, if the risks increase investors start fearing the market.



What causes a market crash?



Political instability in a country is the chief reason for a market crash. A simmering turmoil that threatens the government is bad news for the markets. Unfavorable events might ensue like foreign institutional investors (FII) may draw out their money and hunt for stable pastures to invest in. Stock markets are known to usually plummet in a situation of political instability.



Strong economic growth and healthy employment rates is good news for the markets. Rumors can cause havoc in a consistently increasing index level. Global increase in oil prices, slump in economic growth and such disastrous news can deal a severe blow to market performance. So much are our markets transparent to global events that one must not be surprised at a crash here owing to some crisis miles away in the US.



Finally, scandals and scams of huge proportions can adversely impact the markets.



What is a market crash?



In times of a surging market, investors are busy churning out profits. A bull market is an indicator of strong economic times. However, investors must not forget that after a bout of good times follows the downturn. Throughout history, we have seen this cyclic pattern of market ups and down. If there is incomprehensible surge and the market appears over-heated, predict a slide anytime. The safest thing to do would be to book profits and invest elsewhere. Being too ambitious can cost the investor big.



In a crash, it is not a single company whose stock is impacted. The value of stock drops drastically across the board. The market crash sees dropping of price across sectors. Investor panic adds fuel to the fire. Perceiving a fall many investors prefer to get out with what they can lay hands on. So they rush to sell their stocks. This further brings down the stock price.



Investing in volatile times




  • The thumb rule is never invest more than what you can afford. Borrowing money or selling your properties to invest in the market is perhaps the riskiest thing to do. Never lock all your savings in the market. Older investors must not rely heavily on the markets as preservation of capital is of greater concern.

  • Pick stocks that are fundamentally sound. This is a crucial decision and must be done after considerable research. The picks of good companies will do well when the economy rebounds.

  • Invest systematically. With a disciplined approach, though there may be temporary set backs, over the long term the results will be worthy.

  • Do not track the index minute by minute. Over obsession with the markets can upset investors and set them into panic mode. Investors should bear a long-term perspective and not buy/sell at inappropriate times. Shrewd investors can use the opportunity to deploy prudent investment strategies.

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