Skip to main content

Equity Investing - Stop loss is a strategic device

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

 

 

Setting one forces you to consider the chances of losing money


Market traders use all sorts of stock- picking systems ranging from the exotic to the rational. Some decode lunar cycles, others toss darts at newspapers, while the rational look at price- volume changes and dissect news for potential price- impacts.

All successful traders have one thing in common. They use stop losses. There is a survivor bias here –traders who dont set stop losses tend to get wiped out and leave the market. People set stops at different levels and in different ways depending on individual riskappetites and preferences.

Long- term active investors also pick stocks according to many different criteria. Some are fundamental in approach but growthoriented.

Others look for value. Some buy stories with promise even when the current financials dont justify it.

However, active long- term investors generally dont use stop losses. Some benchmark their portfolios to indices but that is different.

Most active long - term investors dont have a set strategy for controlling losses in case decisions go wrong.

This is an odd gap in investing logic. A long- term investor is taking high risk bets over a long timeframe. Being a buy- only, longterm player is less risky than being a short- term buy/ sell trader, but it is still quite risky. The investor is not leveraged and he doesnt short, which means less risk than in trading. But an investor is also prepared to leave money parked in risky assets over very long periods. Even the most stable of stocks will see large price- swings, given enough time. There will be times when the long- term investor suffers large capital erosion and his returns may be negative for years.

It is also inevitable that he will make mistakes every so often.

Even the best investors tend to be wrong at least one- third of the time and usually more often than that. It is perfectly possible to end up with two- thirds of a portfolio doing well, while still suffering an overall loss because one- third is doing really badly.

How does an investor deal with such situations? Ive never seen very coherent answers in the literature.

The traders stop loss is a mechanical device. The details are decided before the trader takes a position. If the stop is kept with discipline, losses are always limited. Without such a mechanical loss- control device, an investor could, in theory, gradually lose all his capital. In fact, many investors, who bet heavily on IT in 2000, or real estate in 2008, did lose 85- 90 per cent.

Apart from mechanical utility, there are two behavioural advantages to setting stop losses. First, the very act of setting a stop forces even the highly optimistic to consider the chance of losing money. This is healthy, given the inherent risks. Second, if a crisis occurs, the trader doesnt need to think about what to do - the decision is already taken.

Controlling loss in a long- term portfolio is obviously not as easy as setting mechanical stop- losses.

But every investor has an individual pain limit - a point where losses become uncomfortable. It makes sense before buying to consider typical situations. Decide what you will do if the stock falls say, 25 per cent from current levels. Will you average down, sell out, or ignore the situation? Write down your thoughts and follow your own instructions if the situation arises.

A comparison with a benchmark index is another filter. Put some thought into picking the right index for your portfolio. There is not much point comparing a bunch of small caps to the Nifty. Also, compare all businesses to peers.

If the portfolio is doing seriously worse than the benchmark, theres something wrong with the investment style. Assuming the portfolio is not under- performing the benchmark, it is still worth reviewing individual stocks. Ideally, keep notes on why you bought every stock and if the variables change, or new information is available, review. If a stock is doing worse than expected compared to the index and its peers, dig for more information.

Above all, be prepared to admit your mistakes. This is a blind spot with all investors. Since an experienced investor does due diligence and has logical reasons for buying, he also tends to become over- attached to the stocks hes bought.

No matter how exhaustive the analysis or solid the logic, stocks can move the wrong way for random reasons, or due to concealed weaknesses that dont show up in financials until too late. Getting caught in such situations sometimes is inevitable. We all end up learning from our mistakes. If you have loss control mechanisms in place, the learning process will be that much less painful.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

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 in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.

Impact of Demonetisation

The government's move to demonetise `500 and `1,000 currency notes will immediately impact reserve money and money supply in the system along with the balance sheet of the Reserve Bank of India, the sole authority in the country for accepting currency notes and coins as legal tender. ET explains the interplay of currency, reserve money and money supply. 1. What is currency in circulation? It is the total value of currency (coins and paper currency) that has ever been issued by the central bank minus the amount that has been withdrawn by it. Currency in circulation comprises currency notes and coins with the public and cash in hand with banks. It is a major liability component of a central bank's balance sheet. 2. What is reserve money? It is essentially the central bank's money . It is also called high-powered money , base money and central bank money . As per the definition, reserve money equals currency in circulation plus bankers' deposits

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis

Mutual Fund Review: IDFC Premier Equity Fund

  IDFC Premier Equity Fund, which falls under the presumed high risk group of mid- and small-cap schemes, can rely on astute and timely equity picks. These make it less vulnerable to fluctuations compared with others in the category   IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes.    While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows. Thus, while an investor can always take the systematic investment plan ( SIP ) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for l
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