Ask any investor who joined the stock market in 2020, and you will hear cries of pain and anguish as the market went head over heels first in 2020 and then resumed its bearish stand at the beginning of 2022. Many investors started questioning the validity of long-term investments considering how many lost their earnings to the recent prolonged stock market meltdown.
Earning money may not be difficult. What is difficult is to be able to retain your earnings. More difficult is to secure yourself from unwarranted losses. Losing money in equities. Out of 100 people that dabble in equities, only two to three have shown success in creating the much-desired corpus. The rest fail to either earn from equities or preserve the money they had earned from their equity investments. If you want to be a successful equity investor, you have to first learn how to not lose money in equities.
Understand market movement
Before you step into the market, learn how it works. Read books, follow the advice of personal finance experts, and learn how to read financial statements to understand the market and its relationship with the country’s economy. Many people attribute their losing streak to their investments in cyclical products and other reasons. However, a basic understanding of the economic and investment market cycles can help you decide your investments, gauge your investment horizon and tweak your portfolio accordingly. You will have realistic expectations regarding your financial goals, thus, leaving no scope for sudden or unforeseen losses.
You must be prepared to adapt to changing business and economic cycles, especially, in times of inflation and during a recession. Stocks decline in value, especially, the high-valued stocks that revert to their near about right valuations. Though there is no way you can time the markets, use short-term market falls to buy high-quality stocks or stocks of growth-oriented companies.
Apart, do not panic during sudden market falls as a temporary fall post a constant rise is common and much needed to drag the markets back to their correct valuations. Do not overreact to sudden market jolts; rather wait for the market to recover on the path to boom so that you can sell your stocks at higher market prices and earn returns accordingly. The idea is to sit tight and hold on to your conviction irrespective of what people around you think or say.
Dabbling in quick-rich schemes
The biggest scam is when someone tells you that you can grow your money by following day trading strategies and buying penny stocks in bulk. This coupled with adhering to unsolicited advice by finfluencers posing as big market stalwarts on various social media platforms increases your chances of losing your money in the markets. Barely 10 out of 100 stock market investors earn returns that beat inflation; the rest do not earn equivalent to fixed deposit returns, thus, explaining how many fail to tap the potential of the market that can make you both rich and pauper depending on how you view the market.
Investing is not a quick-rich scheme. It takes considerable time and analysis to learn how to use the market to your benefit. Stick to proven techniques shared by veteran investors instead of new-age investors who hop the fence in a bid to make it big in a day or a week. You may find yourself a bit lagging in the first phase, but the slow-and-steady approach will surely make you rich enough to create a corpus.
Focus on stock fundamentals
Past performance does not guarantee a continued pace in the future too. However, you may still look at the returns earned by a particular stock and the rate at which it is growing to gauge its quality. The quality of a stock depends not only on the company’s earnings but also on its growth potential. However, apart from the company’s movement, a lot depends on the market and economic conditions of the country.
Apart, you must study companies' financial statements in a similar line of business before investing in a particular stock or group of stocks. Also, compare the profit-to-earnings (P/E) ratio in each to check if a stock is undervalued or overvalued. Comparing the P/E ratios of stocks also hints at whether a stock is worth buying or if there are better stocks that can be bought at the same price to earn more profits in the future.
Read the quarterly, half-yearly and annual statements of the companies that you wish to invest in. Read the messages from their Board of Directors to understand their strategy. A company operating on losses for the first five years is unlikely to do well in future too, irrespective of how promising the founders may sound. Check for companies’ shareholding patterns, recent business tie-ups, contracts signed and cash in reserves to verify their financial health.
Keep your emotions at bay
You may be finding it difficult to sell some of your stocks owing to your emotional attachment to them. This behaviour is not new as many investors remain tied up with their stocks for a decade or more hoping to profit on price rise. While a long-term investment horizon is best, sticking to your stocks just for the love of them is futile. Set apart your emotions from your investment decisions to decide on the purchase and sale of each stock accordingly. Avoid investing in stocks at inflated prices to gain from the boom because most of the time your decision to buy them may backfire. So, do your research well before investing.
Calamities do not matter
Take for example the recent Russia-Ukraine war or the much-anticipated China-Taiwan war that can send your stocks tumbling down to much lower values. During these times, it does not make sense to fear the sudden stock movement and sell your stocks in a hurry. Though these events may affect the economy as well or cause prices to rise, they must affect your decisions to invest in the right stocks.
Choose your investments carefully and hold on steadfast to your conviction. When the stock market falls, use this opportunity to buy some good stocks. Be greedy when others are fearful, and fearful when others turn greedy. Irrespective of how low the market gets down, it is bound to rebound and earn you the much-desired profits.
Do not book profits too early
Everyone loves to earn profits, but this must not prompt you to sell off your stocks soon. A sudden surge in the prices of stocks may prompt you to book profits, which may affect your “buy and hold” strategy. You may sell off some of your stocks to book profits but do not get rid of your entire portfolio. Whether it is buying or sale of stocks, never be in a hurry to decide when to buy or sell. Market volatility should not be the deciding factor behind your investment decisions. B Padmanaban, Founder, Fortune Investment Services says, “There are two stages of investment one is wealth accumulation and another wealth distribution. Wealth accumulation if you book profit then you are curtailing the compounding of your money.”
Beware of the herd mentality
Friends telling you to buy this or ditch that is passé. Get rid of the herd mentality that you may be accustomed to. This is especially true in daily trades when new investors park money in stocks based on tips from friends and peers without evaluating their financial information and looking for fundamentally sound alternative stocks. When you forget to check companies’ fundamentals and look into their sustainability factor, you are missing out on important information that helps you decide if that particular stock is worth keeping or not.
Continuously evaluating stocks’ valuations will get rid you of the fear of missing out on some good stocks that can help you gain in the long run. Remember not to follow the crowd or indulge in overvalued stocks. Have a proper investment plan in place and follow it ardently.
Do not spread your investments too thin
Diversification of investments is important, but that does not mean that you must invest in every kind of investment available. Today’s generation boasts of parking funds in new-age investment opportunities like cryptocurrencies, non-fungible tokens (NFTs), unsecured bonds, ESG stocks and more. While these may prep up the value of your investments immediately, there is no guarantee that they will boost your portfolio in the times to come. You must surely identify stocks across all market capitalization and sectors to invest your earnings. Similarly, you must over-diversify as too many investments may mar your chances of earning returns in the near and distant future.
Explaining why you must not over-diversify your investments, Suresh Sadagopan, Founder, Ladder7 Financial Advisories says, “It will make the portfolio bloated and make it more difficult to manage. Also, too much diversification does not necessarily result in risk mitigation.”
Tracking your portfolio regularly
Keep checking your portfolio regularly so that you can decide which investments to enter and exit for better returns. Also, tracking the status of your portfolio will help you decide when you must decide to exit a particular investment or asset class to refrain from suffering losses. Get rid of your investments that may not be performing well or as per your expectations. Also, invest only when you can afford to do so. Do not exert yourself while parking your money in certain investment opportunities.
Also, make sure to squander away the money in your emergency fund on long-term investments. Know which investments suit you as per your risk appetite and financial goals to decide how to park your money for the best returns possible.
Viral Bhatt, Founder, MoneyMantra says, “Reviewing your investment portfolio is one of the most crucial steps in managing your money. Because if left unchecked, your investments can quickly deviate from what you intend to do with them. So the challenge is to go about this task of reviewing your investment portfolio in an appropriate manner. Check the Investment Account Portfolio Statements for all of your investments every six months so you know how much you’ve earned towards your goals.”
He added, monitor your investments to check if they are helping you reach your goals. If not, you can make changes sooner rather than later. Essentially, there are four basic steps that you should follow to review your investment portfolio.
- Gather everything in one place
- Set your expectations
- Assess your portfolio returns
- Track the right metrics
More people lose money in the market than they earn. One reason can be ignorance regarding money matters. The second is obviously callousness. Identify the reason why you lose money and then decide your investments accordingly.
