A common investing mistake - and its remedy

A common investing mistake made by many small investors is to wait far too long, and let buying or selling opportunities slip away. When the stock market is rising, and portfolio values go up in leaps and bounds, the tendency is to hang on to the stocks or funds in the portfolio to try and squeeze out the maximum amount of profit. The wait to sell keeps getting longer and longer and one fine day, the market cracks for no apparent reason. The investor rues the fact that a selling opportunity near the top was missed.

When the stock market is falling, the same psychology plays out in reverse. Investors try to buy a selected stock or fund at the lowest possible price, and keep waiting and waiting to buy at even lower prices. Out of the blue, the market turns and starts to rise - as if throwing caution and common sense to the winds. A buying opportunity near the bottom is missed.

Seasoned professional investors find it tough to correctly time stock market tops and bottoms. Imagine how much more difficult it is for amateur investors to catch market tops and bottoms. It is not worth trying unless one has become adept at identifying technical signals - and that takes years of practice.

There is a simple way to remedy the mistake of waiting too long and losing opportunities. Inculcate the habit of being fully invested. Regardless of whether the stock market is moving up or down. But it requires a bit of planning and a large dose of discipline. First of all, investors require a financial plan based on their income, savings and existing and future financial commitments. Help can be sought from a professional financial planner (for a fee) or a CA friend (for free). But it isn't rocket science. Knowledge of Class 5 arithmetic is good enough to do it yourself.

Then one needs an asset allocation plan, based on risk tolerance. This post explains the concept of an asset allocation plan. Once the plan is in place, investors should have the discipline to stick to the plan at least for two or three years. Change the plan only if things don't work out. Investing without a plan is like travelling without a destination.

If the asset allocation plan indicates it is a good time to buy (because the equity portion of the allocation has fallen below a pre-set threshold level), start buying systematically. By using cost averaging or value averaging concepts. Read about these concepts in this post. Identify a couple of good stocks or funds. Then decide how much of each you want to buy value-wise. Spread out the buying over a few months, till your asset allocation plan is rebalanced.

If the asset allocation plan indicates it is time to sell (because the equity portion of the allocation has exceeded a threshold level), don't wait any longer. Start booking profits partially. To find out more about partial profit booking, read this post. Remember to keep the flowers and cut the weeds in the portfolio first.

Are you ready to splurge at the discount sale in the stock market?

Discount sales in retail stores happen several times during the year. They advertise ‘buy-one-get-one–free’ sales and ‘upto 50% discount sales’ that bring in buyers by the hordes. If you have ever visited a retail store on the last day of such a sale, you will find a scene of utter devastation – stuff strewn all over the place and buyers practically yanking things off other buyers in a last desperate bid to find a bargain buy.

What is interesting is that the same buyers (or their friends or cousins) become completely reticent when a discount sale is going on in the stock market – keeping their wallets glued to their pockets. No one rings a bell or takes out full-page advertisements in newspapers to announce a sale in the stock market. One fine day, when everything seemed to be full of sunshine and happiness, people realise their stock or mutual fund portfolio is decreasing in value. Stocks and funds that were flying into orbit suddenly start to nose-dive.

The initial reaction is usually denial. This must be a temporary phase. The correction will soon be over. Experts suggest: “Buy the dip”. Those who entered a bull market late (they are mostly new investors attracted like flies to a pot of honey) start ‘averaging’. When the stock market continues to fall, denial is replaced by shock. All the ‘averaging’ does not prevent a stock’s price from crashing. In sheer panic, investors sell off their holdings to recover whatever little they can.

That is when the real sale starts in the stock market. Experts opine that the index can’t fall any more; 4700 or 15700 or some such number should be the bottom; this is a good time to buy into blue chips. And then the stock market decides to offer even better discounts! But where are the buyers? Why aren’t they falling over each other in trying to lock-in the best bargains?

Many years ago, in a training class on the art of selling, I learned two important lessons. The first lesson: When some one leaves you a message stating that the ‘matter is very urgent’, the urgency is the person’s who left the message. He has probably not yet met his quarterly or yearly sales target – which means no bonus payment and may be even a ‘pink slip’. Don’t call the person back. Let him call again.

The second lesson: When some one offers you a very good deal – so good that you are tempted to whip out your cheque book – smile politely and refuse. The deal will usually get even better! Those who have negotiated a car purchase – particularly a second hand one – will know what is being discussed.

The same goes for Mr Market. He announces discount sales only once in two or three years – not several times a year like retail stores. But if you have the patience and skill to ‘negotiate’, keep smiling and refusing to accept his offers. Even if strong performers are trading at 52 week lows. You will find that his offers get even more mouth watering.

At some stage, Mr Market will get fed up with you (and others like you) and start increasing prices – not in one shot, but gradually. Much like the way he kept offering better discounts with each passing week. That is the best time to start buying. You may not get the absolute lowest bargain price. But you can sleep peacefully at night knowing that henceforth, prices will start rising. 

Should investors keep a beady eye on the BDI (Baltic Dry Index)?

What makes successful investing in the stock market (or mutual funds) such a challenge (or, intellectually stimulating – depending on your mental makeup) is the wide variety of factors and indicators that you need to keep track of. The Baltic Dry Index (BDI) is one such indicator that many investors may not have a clue about.

What is the BDI, and why should investors keep a watchful eye on it? This is how wikipedia.com describes it:

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. … the index tracks worldwide international shipping prices of various dry bulk cargoes.

The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore, and grain."

In plain English, the BDI gives an indication of international rates for transporting raw materials by sea in cargo ships of different sizes – based on supply and demand of commodities.

Why should stock or funds investors be interested in the current state of the BDI? Most economic indicators, like consumer spending, unemployment figures, housing starts are lagging indicators. That means, we get to assess the implications after the events have already occurred.

However, the BDI is a leading economic indicator because increasing demand for raw materials (which leads to higher shipping rates) is a signal of greater economic activity. That in turn, leads to growth and higher stock prices. Likewise, a fall in the BDI indicates declining demand for raw materials, leading to reducing economic growth and a likely slide in stock prices.

Unlike stock and commodity exchanges, where speculation is an important part of the overall activity and may camouflage the actual supply-demand equation, the BDI is free of any speculation since the index is based on shipping rates on various representative routes submitted by international shipbrokers who have actual cargo to transport.

Supply and demand of raw materials is not the only reason for changes in the BDI. Availability of cargo carriers, heavy traffic on certain routes, bad weather, price of oil can all contribute to higher shipping rates. Like all indicators, the BDI can’t be used in isolation.

Over the past year, the BDI has fluctuated between a high of about 2750 in Oct ‘10 and a low of about 1050 in Feb ‘11. It rose sharply from 1270 in Aug ‘11 to its current level of 1890. Is it indicating that the global economy may not be in the doldrums that many economists are suggesting?

Is the interest rate increase by RBI good or bad for investors?

Increasing interest rates are great for older investors and retirees. Their loans have mostly been paid off. They rely more on stable fixed income instruments, and higher interest rates are always welcome even if it isn't enough to cover inflation.

For younger investors, who can afford to take more risk and invest in the stock market or mutual funds, higher interest rate is bad news. Why? Because stock markets and rising interest rates are inversely proportional. Many market players use loans and margin money to invest. Their costs increase and make their leveraged investments unviable. Companies have to pay more interest, which affect their profits. They tend to hold back on capital expenditure, which affects growth.

As growth starts to slow down, the investment environment changes from bullish to bearish. Investors start to book profits, and move to safer havens like bank fixed deposits and gold.  The Sensex starts sliding which leads to more selling. It has a spiralling effect.

Doesn't the RBI know all this? Why are they increasing the repo and reverse repo rates again and again? Don't they know that growth is getting stifled?  The short answer is: they know what they are doing. But the RBI is caught between the devil and the deep blue sea. With inflation threatening to go out of control, increasing interest rates is the only tool they have - even if it causes a short-term growth slow down.

Unfortunately, the government is not playing its part. Bold policy changes are the need of the hour - FDI in multi-product retail, industry-friendly labour policies, unified tax regime are some of them. But such policies may upset the apple-cart - the nexus between politicians and their crony middlemen. The greater good is being sacrificed so a few people can get incredibly rich. Cutting out the middlemen will immediately put a tight leash on inflation. Interest rates can then be lowered and the economy will get back on the growth path. But that seems like wishful thinking.

What are the likely next steps? For the RBI, probably more rate hikes till the base effect kicks in and the inflation rate starts to moderate. For young investors, the stock market is unlikely to make new highs any time soon; so a good time to read up and, hone stock-picking skills. Lower levels of the Sensex may provide good opportunities to enter. For older investors and retirees, enjoy the high interest regime while it lasts.

A beginner’s guide to stock investing – a guest post

Most new investors jump into the market when the Sensex is near a peak, and there is a feeling of euphoria all around. That is precisely the wrong entry point. Investors tend to shy away from the stock market when bears are on the prowl and even well-known and well-established companies trade near 52 week lows.

Nishit feels that bear periods are great times to do your homework and get ready for entering the market once things improve. In this month’s guest post, he explains the steps that novice investors can take for building wealth through stock market investments.

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I often face this question from my colleagues: How do beginners begin investing in stocks? The fear factor is what prevents many people from investing. The first step is often the most difficult one to take to start as an investor.

One of the first things to do is to start small. Start with a capital which you can afford to lose. The ‘tuition fees’ are needed to be paid to the markets. Till one actually invests (and loses some money), one cannot get a feel of the markets. Now that one has earmarked a small sum to play with, the next step is to identify a decent online brokerage. Most of the novices are normally fixated with the amount of brokerage one has to pay. That should be the least of one’s concerns. Remember you are an investor, not a trader. Best is to stick to some big player like ICICI Direct or HDFC Securities.

So, we have allocated funds and have an online account in place. What next? Now comes the most interesting part. Nothing beats reading. While your account is being opened, do start reading. Read the Economic Times daily, and the Hindu BusinessLine on Sundays. There are several good books for reading, like Beating the Street and One up on Wall Street by Peter Lynch; Rich Dad, Poor Dad by Robert Kiyosaki. Once one has read up a bit, one can read the grand daddy of all investment books, The Intelligent Investor by Benjamin Graham.

When buying a stock, make sure you are clear in your mind about why you are buying the stock. Start off by buying blue chip stocks. Remember if one makes losses initially it may put off the investor from investing for a lifetime. Stock picking is a fine art and one improves with time.

Also, start of by visiting blogs and websites like www.equitymaster.com to get a feel of the markets. Make sure you review your portfolio once a week. A portfolio should contain about 5-10 stocks. Next is keep track of earnings and news related to one’s stocks by visiting www.nseindia.com

Often, the process of seeing a blue-chip winner is more interesting and satisfying than the actual profits one makes. Each of us is a specialist in the field where we earn a living. Start off by exploring stocks in your area of competence. A doctor could explore Pharma stocks, an IT engineer the software companies, and so on. Also, ask your friends and relatives about companies in their domain of expertise.

The housewife is one who has a vast circle of competence. She knows which items are popular in the grocery store and can look at investing in those companies.

Those folks who find doing all this cumbersome and boring, mutual funds are the easier way out. HDFC Top 200 is a blue chip fund with a portfolio of good companies which has returned compounded 23.58%, which means Rs 10 invested in 1996 is now Rs 196. 20 times returns in 15 years. In this case, sit back, relax and enjoy your life.

For all Mutual Fund Investors, www.valueresearchonline.com is the mother of all sites. One can research one’s fund here and invest.

To create wealth, stock market investment is a must. It is not rocket science and even the lay person with a bit of reading up can become an informed investor.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Is this a good time to buy stocks/funds/gold?

Many small investors must be thinking about this question. Anecdotal evidence from the emails and comments I receive suggest as much. The answer is quite simple: It is a good time to buy if you have the money.

Experts will tell you that timing the market is not a sensible approach to investing. It is how much time you spend in the market that counts. That is because most small investors are happy to book small profits, and miss out on the big profits that can be made by holding on for the long-term.

So, why is Jim Rogers, an acknowledged guru of the commodity markets, advising caution about buying gold; and ace stock market investor, Rakesh Jhunjhunwala, suggesting that it isn’t time for bottom fishing yet? Why this apparent contradiction?

The dichotomy arises due to the different viewpoints of two different groups of investors. For the multitude of inexperienced retail investors, timing the market is not recommended. They just do not have the knowledge to put together all the little pieces of a vast economic jigsaw puzzle. Professional investors like JR and RJ know what they are doing, and can go in and out of markets with surgical precision.

When our Finance Minister said that the recent fall in stock prices was a result of western disturbances and had nothing to do with India, he was deliberately speaking a half-truth to try and prevent a bigger crash. Why? Because uncontrolled inflation and consequent hikes in interest rates had already slowed down the profit growth of India Inc., and pushed the stock market into a down trend.

Resolution of the economic crisis that gripped USA and Europe through tough policy measures by central banks was postponed by rounds of quantitative easing and bailouts. Now the sovereign debt problems are coming home to roost.

Global stock markets, India included, had a heady rise from the bear market lows of Mar ‘09. It is time for a reality check, and the picture isn’t pretty. No wonder gold prices are shooting through the roof, as fearful investors are dumping stocks and funds to buy the yellow metal.

The good news is that the Indian economy is in far better shape than those of the developed countries. Growth has slowed, but remains strong. However, inflation is still rising. Another couple of rounds of interest rate hikes are almost a given. That means more pain for investors in stocks and mutual funds in the near term.

But, as I mentioned in the beginning, if you have the money and a long-term view, this is a good time to buy. Don’t bet the barn. Invest 20% of your available surplus every month for the next 5 months. Things should start improving by then. Avoid individual stocks if you haven’t mastered stock-picking skills. Split your investments between a good balanced fund (like HDFC Prudence or DSPBR Balanced) and a good large-cap fund (like HDFC Equity or DSPBR Top 100).

I’m not a great fan of buying gold, because it gives no regular returns. The flight to gold is assuming panic proportions, and panic buying leads to severe corrections. If you must buy gold, buy a gold ETF during the next price dip.

Related Posts

"Time in" vs. "Timing" the market

Should you invest in Balanced Funds?

Gold and Silver Chart Patterns: divergent directions

Seek opportunities in this HDFC fund

The HDFC Mutual Fund house has been one of the best performers in the Indian market with several 5-star rated funds under management. Some of these funds have track records of 10-15 years. That means they have been through two bull-bear cycles.

However, a younger fund – barely 4 years old – has been performing quite well. The HDFC Mid-Cap Opportunities Fund (HMCOF) caught my eye because of several interesting allocation features in terms of percentage of net assets. These are listed below:

1. Mid-Cap companies:   70-95%
2. Small-Cap companies: 5-15%
3. Other equity/related:  0-25%
4. Debt/money market:   0-25%
5. Derivatives (equity/debt): 0-20%
6. Foreign securities: 0-25%

With such a wide array of investment options, the fund managers - Chirag Setalvad and Miten Lathia (dedicated for overseas investments) - have a lot of lee-way in playing around with different permutations and combinations to achieve optimum returns. What kind of returns have they provided so far?

Not bad at all. One year CAGR  of 11.58%, three years CAGR of 22.85%, and return since inception (in June 2007) of 12.9%. During the bear market period of 2008-09, the fund dropped 38.1%, outperforming its benchmark index CNX Midcap (which fell 45.4%).

One of the problems faced by many small investors is that they have limited capital. The large-cap ‘A’ group stocks appear to be too expensive – both in terms of price and value. Instead of buying a small quantity of a large-cap stock, investors have a propensity to buy larger quantities of mid-cap and small-cap stocks. While such stocks can provide great returns during bull markets, they tend to crash through the floor in bear markets.

The HDFC Mid-Cap Opportunities Fund seems to be tailor-made to solve the above problem. The flexibility of hedging the portfolio through derivatives, and by adding debt/money market instruments and foreign securities helps to protect the down side to an extent.

The fund’s portfolio of mid-cap stocks should make any knowledgeable investor drool. Here are some of the top stock holdings:

1. Ipca Laboratories
2. Carborundum Universal
3. Bata
4. Lupin
5. Exide
6. Vesuvius
7. Federal Bank
8. Union Bank of India
9. TTK Prestige
10. Tube Investments
11. Glaxo Consumer
12. Divi’s Lab
13. Sundaram Fasteners
14. Tata Chemicals
15. FAG Bearings

The fund also holds Crompton Greaves and Biocon, which haven’t performed all that well. A small amount invested regularly in HMCOF gives an exposure to some of the best known mid-cap companies that one can think of.

What small investors can learn from my trip to the bank

Thanks to the technological innovations of debit cards and credit cards, my trips to the bank have become few and far between. So, on the rare occasions that I do visit a bank, I’m pleased to see lots of eager, young faces looking busy and ready with a smiling ‘Can I help you, Sir?’ welcome.

The initial good feeling soon turns to exasperation. I had gone to get a copy of the account statement for March ‘11 that I had misplaced. A pretty young lady said it would only take a couple of minutes, and would I mind the wait? Not at all, I assured her. That is when things started going wrong.

First, she wanted to know my account number. Since I didn’t remember it, I gave her the April ‘11 statement copy. My daughter’s name appeared as the holder. So, the next question – without even checking that I was the second holder – was, who do you bank with? I mentioned the name of two competing private sector banks.

She had taken a look at the account balance, and came up with: Can we help you with your investments? I said, no thanks. By this time, a bright-looking male colleague came to inform her that the printer was down and the statement will be couriered to me. But he had overheard our conversation and decided to jump into the fray with: Have you thought about a SIP in a mutual fund?

I was already feeling irritated because the trip to the bank had been a waste of time. So I mentioned my preference for investing in stocks and asked him whether he had started a SIP. He proudly announced that he invested 20000 in a SIP every month, and explained how his holding cost will average out over the ups and downs of the market.

Had he thought it through, or was he merely repeating what he had been taught? It was his turn to be irritated. Simple arithmetic, he scoffed. When the market goes up, he gets fewer units, but when the market falls he gets more – so it averages out!

Had he done the arithmetic with real data? Did he know that bull markets tend to last 3 to 4 times longer than bear markets? Therefore his average holding cost is likely to rise over time? Now he didn’t look so confident. So he tried a different tack – not willing to pass up an opportunity to ‘cross-sell’.

Had I thought about investing in a private equity fund? I told him that SIPs and private equity funds are thought up by fund managers to help the fund and their own pockets. They don’t benefit the investor to the same extent.

He made another effort: A competing bank has made a ton of money by floating three private equity funds. I responded with: Does it prove that your fund will make money? Now he played his trump card: How do I make money when the market is down – like now?

I explained that investing is not a job where one had to make money every day. If one invests in good dividend paying stocks, like TISCO or ITC, then one can earn money whether the market is up or down. ‘Every one knows ITC pays good dividends’ – was his parting shot. So how many ITC shares did he own? He had accumulated 70 shares. Instead of his SIP, why didn’t he buy 100 shares of ITC every month? No answer this time – end of debate.

The moral of the story is: Regardless of whether you concur with my antipathy towards SIPs or not, always question investing strategies – whether you have thought it up yourself, or received advice from anyone.

Related Posts

About Cost averaging and Value averaging strategies

If you must SIP, sip good Darjeeling tea

5 reasons why small investors should avoid stocks and buy mutual funds

Reason No. 1: Insufficient funds

Many small investors are unable to spare more than Rs 5000 or 10000 per month for investing. Such amounts are insufficient for investing in excellent stocks. Investors can at best buy only 25 shares of ITC, or 10 shares of HDFC.

Alternatively, they can buy 50 units of DSPBR Top 100 fund. The fund’s equity holdings include ITC, HDFC, TCS, Larsen & Toubro, Coal India, ONGC, ICICI Bank, Hindalco, Grasim, Bank of India, Bharti Airtel, Glaxo Pharma, Lupin, and many more stalwart stocks. 

Reason No. 2: Insufficent knowledge

Small investors have very little knowledge of how the stock market works, and what are the rules and criteria for success. They jump into the market feet first – attracted by stories of untold riches with very little effort. No wonder they end up losing big time.

Some never recover from the initial trauma, and quit the stock market for ever. Others plod along manfully, feeling happy if they can recover their losses after a few years. A handful eventually learn the ropes and end up with a decent retirement kitty.

It is much better to invest in a mutual fund, and leverage the knowledge of the fund manager.

Reason No. 3: Insufficient time

For most small investors, buying and selling stocks is a part-time activity that provides some extra money and thrills. But to become truly wealthy from one’s stock investments, one has to be engaged in it full time.

Why? Because one has to learn and monitor a variety of information – the economy, its particular cycle stage, inflation, interest rates, oil and other commodity prices, activities of FIIs and DIIs, quarterly results of individual companies, analysing annual reports, tracking promoter activities, their shareholding, and so on. Most investors have insufficient time to spare for such learning and monitoring.

The fund manager and his team get paid to do such monitoring on a daily basis. Benefit from their services.

Reason No. 4: Insufficent experience

It takes years of experience in the stock market to learn the intricacies of fundamental and technical analysis that would enable a small investor to distinguish between a good stock and an excellent stock. A good stock may give you decent returns over a couple of years and then fall from glory (think Pantaloon or Suzlon). An excellent stock – like ITC or HDFC – will provide superior returns year after year, and can be bequeathed to future generations.

Take a re-look at some of the stocks in the portfolio of DSPBR Top 100 fund (mentioned in Reason No. 1 above). That is an excellent portfolio selected by an experienced fund manager.

Reason No. 5: Insufficient risk tolerance

Almost inevitably, a stock falls in value when a small investor buys it, and rises in value when a small investor sells it. The result is usually panic, and a desperate desire to either recoup the loss or re-enter for more profits at the earliest. Without knowledge of her own risk tolerance, a small investor invariably sells too soon or buys too late.

Better leave the buying and selling of portfolio stocks to the fund manager, so you can sleep more easily at night.

Please note that a fund manager is human and can make errors in judgement. That is why it is important that you do a little research before selecting the fund you buy. Keep investing your monthly savings regularly in buying a fund through bull and bear markets. After a few years of regular investing, your investments are likely to grow considerably – and so will your experience. Then you can contemplate building a stock portfolio of your own.

Related Post:

Why building a stock portfolio is like buying a car

Why building a stock portfolio is like buying a car

One of the requests I receive most often from blog readers and newsletter subscribers is to help them in building a ‘good’ stock portfolio. Many think that this is a trivial task. All they need is a list of ‘good’ stocks to buy. It is not that simple. A portfolio is not a ‘T’ shirt with a ‘L’ written on its label that will fit 90% of investors. It needs to be custom-tailored for a near perfect fit, to suit each individual investor’s background, experience, financial commitments, risk tolerance, and future plans.

But the real problem lies elsewhere. Most young investors can spare Rs 1 - 2 lakhs. Some have recently started earning and can only spare Rs 3000 – 5000 per month. These are insufficient amounts for building a ‘good’ stock portfolio. So, I use the analogy of buying a car.

One doesn’t go out and buy a car – specially if they have just started earning. Some prior planning is required. (Car loans are readily available nowadays, but the EMIs can burn a big hole in your pocket.) A better option may be to buy a scooter or motor cycle for immediate transportation needs. Even then, you need to learn the rules of the road, and get a driver’s licence before you buy anything.

Unfortunately, there is no licence required to invest in the stock market. Most small investors jump into the market without any knowledge of the basic rules of investing. No wonder their stocks crash and they suffer heavy injuries (to their savings). Grow your capital by regularly investing in fixed deposits, recurring deposits, PO MIS, ETFs, mutual fund units till you have sufficient capital to buy a ‘good’ car.

Can’t you buy Rs 3000 – 5000 worth of stocks every month? Yes, but which stocks? You can’t even buy 10 shares of Tata Steel. So you’ll probably buy 100 shares of Suzlon instead, or worse still, 800 shares of Cranes Software! Your risk of loss will increase proportionately. You are far better off investing that amount of money every month in a ‘good’ fund like DSPBR Top 100 or HDFC Prudence. After 5 or 6 years of regular savings, you may have sufficient capital for a ‘good’ portfolio.

How much is sufficient capital? I suggest Rs 5 lakhs as a bare minimum. Rs 10 lakhs is a more reasonable figure. Can’t cars be bought for Rs 1 - 2 lakhs? Yes, they can. But they won’t be ‘good’ cars. How about a used car? That may work, but is likely to require regular trips to the service centre for repairs. And you really can’t be sure if a used car is really a ‘good’ car. The previous owner may not have driven or maintained it properly.

Even with Rs 5 lakhs, you will only be able to buy a decent entry-level car. But if you are ready to spend Rs 10 lakhs, then your choice of ‘good’ cars increases significantly. And if you own a Rs 10 lakh car, chances are that you will take good care of it by following scheduled maintenance procedures, getting repairs done promptly, adding accessories that will enhance your driving comfort and experience.

A ‘good’ stock portfolio needs sufficient capital, and has to be nurtured and maintained as well – by keeping track of market happenings, individual stock results, using opportunities to book part profits or add more on dips. The emphasis should be on safety, and not about driving/investing recklessly.

Planning for a hassle-free Retirement (a guest post)

Do you remember what you did with your first pay/payment cheque? (Haven’t received your first cheque yet? What are you doing on this page!) Did you blow it up having a good time with friends and family? Why not? You don’t remain young forever. There is a long and bright future ahead of you – and plenty of time to save and invest. Right?

Nishit doesn’t think so. He started planning for his retirement as soon as he received his first pay cheque. He wanted to use the leverage of compounding over his entire working life. In this month’s guest post, he explains why.

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Everyone invests money with the aim of having a comfortable nest egg at retirement. Most of us have not worked out how much money we need at retirement, and at what rate of return we will be comfortable. Most of us chase multibagger returns in the equity markets, burning our fingers in the process.

The magic of compounding is such that 1 lakh invested in the markets today turns into 19 lakhs after 20 years at a rate of 16% return every year. To make 16% every year your asset portfolio need not take undue risks. A Government securities fund over the past 10 years has given a compounded return of 9% on an annualized basis, and a good mutual fund like the HDFC Top 200 has given annualized return of 34% over the past 10 years.

Inflation is a monster which is like a silent killer. Now assuming an inflation rate of 8%, after 20 years, expenses of 1 lakh become 4.66 lakhs. Your assets of 1 lakh have transformed into 19 lakhs whereas the expenses have just gone up to 4.66 lakhs. You have a nice cushion of 14 lakhs.

Gold as an asset class has also yielded an annualized compounded return of 17% over the past 10 years. The trio of equity, gilt funds and gold should form the cornerstone of any investment portfolio. What I am trying to point out here is that investments need not be complex; any common person can invest making use of investment vehicles like Mutual Funds.

The above returns are through investments using the SIP (Systematic Investment Plan) method. One can invest a fixed amount every month, say Rs 5000 each, in a gold ETF, equity fund and a Debt fund. The idea of doing this is that you do not try and catch the bottom or top of any market. One need not invest in too many funds at one go.

India’s economy is growing and will continue to do so for the next 10 years at least. Anyone who is planning to retire with a comfortable income must start doing a SIP at the earliest. By doing this, one can ensure that one is financially independent after retirement. Add to this a Medical Insurance policy that will cover major health care expenses post retirement. The earlier one buys a Medical Insurance policy the fewer are the tests one has to undergo and easier it is to get one. Everyone should have a personal medical health insurance policy, as company policies expire when one leaves the company.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

10 DOs and DON’Ts for making money in the stock market

Making big money – really big money – that allows you the freedom to do what you want, when you want and wherever you want must be the dream of every human being in the planet (except those who become monks or nuns). Only a few manage to make the dream a reality.

Those who follow the straight and narrow path end up toiling all their lives – slaving at a job, or trying to run a profession or business. Those who prefer a more crooked road usually have a short career and end up as state guests with free room and board – unless they manage to become politicians powerful enough to stay away from the long arm of the law.

Making really big money is not a realistic goal for most law-abiding citizens. But making a lot of money – enough that you can have a comfortable retired life that doesn’t require you to cut corners and lets you enjoy some of the material pleasures that life has on offer – is a more achievable goal. The stock market is a place that can help you to achieve the goal by supplementing your regular earnings.

Here are 10 DOs and DON’Ts for making money in the stock market:

DO…

1. Make a financial plan. You don’t have to be a CA to do this. All you need is a little common sense and some knowledge of arithmetic. Think of all the major expenditures – children’s education, daughter’s marriage, buying a flat – at different times in the future and assess how much money will be required for each. That will give you an idea of how much you need to save.
2. Make an Asset Allocation plan. This is the key. You need to know how much of your savings you should invest in risk-free instruments like Post Office MIS or bank fixed deposits, and how much you can afford to invest in riskier instruments like mutual funds and shares. By maintaining a plan, you will know when to buy and when to sell.
3. Learn about the stock market before entering it. Can you get into an IIT or IIM from the Kindergarten? Can you face the fast bowling of a Brett Lee or a Dale Steyn if all you have played is tennis ball cricket? In the stock market, you will be playing against the likes of Rakesh Jhunjhunwala and Ramesh Damani. If you don’t know what you are doing, they will take all your money. Read books by Gurus like Graham and Lynch.
4. Learn how to select stocks and build a portfolio. Haphazardly buying and selling stocks (or funds) on some one’s advice or your ‘gut feel’ is a sure way to make losses. Learn the process of selecting stocks for a portfolio, and holding for the long-term. There are several articles on this blog that can get you started.
5. Learn to be patient and disciplined. The stock market is not a place for showing off how smart or enterprising you are. Those qualities are great for a business venture. In the stock market, you have to be observant and vigilant. Choose the times you want to buy (near bear market bottoms) and the times you want to sell (near bull market tops) carefully. The rest of the time, just wait and watch. Rome wasn’t built in a day. Neither will your wealth.

DON’T…

1. Think that making money in the stock market is easy. The stock market isn’t a zero-sum game. While there is a buyer for every seller, only a few make money. The majority lose. They are the ones who thought making money was easy.
2. Feel like a genius if you have made some money. It was most likely a combination of luck and a bull market. Going through bull, bear and sideways markets with your wealth intact requires determination and perseverance. If you are feeling excited and having fun, a loss is just around the corner.
3. Forget Buffet’s Rule No. 1. Regardless of whether you have a shorter or longer investment time frame, always set stop-losses. That will help you to limit your losses. If a stock is running up fast, set a trailing stop-loss. (If you don’t know anything about stop-losses, you need to read my eBook. It is FREE.)
4. Be too greedy. Have profit targets for each stock (or fund) in your portfolio. Once the target is hit, sell 50% and hold the rest with a trailing stop-loss. Sell all when the trailing stop-loss gets hit.
5. Ever trade. According to Peter Lynch, the odds of success are greater at the race track or casino. Most trade to get rich quick. But there are no short-cuts in life. Trading is the best way to get poor quick; or, to become a reluctant long-term investor (when the trade goes completely wrong!).

There are no sure-shots in the stock market. But if you follow this simple set of DOs and DON’Ts, you will make a lot of money. Not tomorrow, or the day after. But after 20 years. Might as well get started now.