Mistakes Smart Investors avoid

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Stay the course in a bear market and think long-term to gain from stock play

   Stock market was not a great place to be in last year. A host of issues like the euro zone crisis, slowdown in the domestic economy and the policy paralysis spooked investors in 2011.

While the broad-based Nifty lost 21% during the year, the CNX Mid Cap lost 32%. Some sectoral indices like the CNX Infrastructure and Bank Nifty were down 39% and 32%, respectively. And things don't look rosy for 2012. Most investment experts believe the stock market is likely to remain subdued this year too.

 

However, these don't mean you (or investors) should stay away from the market, as the market can always spring a surprise. For example, not many people were bullish on the market in 2009, but it gained over 80% that year. That is why it is important that you tread cautiously in the market so that you can reap the most from any upside.

Don't Buy A Stock Because It Is 'Cheap'

Since we were in a bear market for the major part of 2011, several stocks were beaten down badly. Especially, most of the stocks in the infrastructure as well as real estate sectors were badly mauled. Many investors feel that since these stocks — badly bruised and available at attractive valuations — are great value picks. One must, however, realise that price does not matter when picking stocks. The valuation of a business determines how much the stock is worth and not the price at which it is traded.

Before buying a stock one should research well. Consider how well the company is likely to do in the current macro-environment, how much it depends on government policies, does the management have a proven track record and so on before deciding to buy a stock. Buy after you do a proper research. Also, keep in mind that penny stocks are an easy target for traders to manipulate since there is low ownership, low market capitalisation and they can put in large buy or sell orders. At any opportune moment such operators will dump the stock, leaving retail investors stranded.

Don't Panic And Sell If The Market Goes Down

The stock market is likely to be volatile this year too. Obviously, many investors get nervous when there is a sharp fall in the market. More so, when several blue chips lose heavily. For example, many blue chips like L&T, State Bank of India, Reliance Industries have recently touched their yearly lows.

However, experts advise investors against taking hasty decisions on the basis of short-term market conditions. There is no need to panic and sell as valuations are low for several blue chips which indicate we are close to the bottom. From lower levels the bounce back could be pretty sharp. As seen in March 2009, when the Sensex touched the levels of 8500, it bounced back pretty fast, and by November 2009, it was close to 16,000. Moreover, the fundamentals of the Indian economy are sound and there is no such need to panic. GDP growth is expected to be robust at 6.5%. Even on the global front, recent data on jobless claims and new home sales from the US is positive, though some uncertainty still remains on the euro zone. The market could be volatile on bouts of global uncertainty, but that phase is expected to be temporary.

The time to buy is when the markets are falling. So if you have the cash and are convinced about the fundamentals of blue-chip companies, this could be a good time to buy. Definitely this is not the time to sell.

Don't Behave Like A Trader

Many investors are ready to hold a stock for as long as three years when they buy it. They do fundamental research and after they are convinced with the business and valuations, they invest.

However, once the investment is done, they need the flimsiest of excuses to lose patience and hit the sell button. They start checking stock prices virtually on a minute to minute basis. Not to forget the so-called experts holding forth on the prospects of the stock in the next two days to next month.

The biggest mistake people make is not differentiating between longer-term investing and shorter-term trading, which we call speculation. The rules are totally different for the two.

Don't Stop Your Equity Sips

Systematic investment plans (SIPs) are a common tool used by many investors to invest in equity mutual funds, individual stocks as well as exchange traded funds (ETFs). Typically, since you invest a fixed amount every month, it eliminates the risks associated with timing the market. Now with the outlook for the stock market having turned negative, many voices are wondering aloud whether it makes sense to continue with SIPs.

It is virtually impossible for any investor to buy at the bottom and sell at the top. Hence if you stop your SIP in bearish markets it would defeat the very purpose of investing in this manner.

Since the markets are bearish you can get a higher number of units at lower prices over the next few months. Besides this, many of us do equity SIPs to meet various goals in life such as children's education, wedding, or a foreign trip. Cancelling your equity SIP in between or skipping a few installments would make it difficult for you to meet those goals. While equities can be volatile in the short-term, in the long-term they offer higher returns as compared to other asset classes.

Don't Stray From Your Asset Allocation

One thing which most financial planners suggest is sticking to your asset allocation. Asset allocation is diversifying your money across different asset classes such as equity, debt and gold. The objective of this exercise is to minimise risk and maximise returns. So if you have 50% of your assets in equity, 40% in debt and 10% in gold, maintain it.

Many a time, while chasing high returns, investors end up changing their asset allocation. Just because gold did well in 2011, does not mean that you increase allocation to gold in your portfolio.

 

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