13 October, 2008

Things you shouldn't do in the present stock market

Stock-picking, or even deciding whether to stick with equities or not, has never been more difficult. However, if you are still looking at stocks, there are four things you have to avoid. In fact, these can come handy at all times:

(1) Don’t give in to market moods

Stocks are not about growth and profits of corporates alone. They also reflect the mood of the economy and investors. Due to this, markets have a tendency to slip into the extremes of both downside and upside.

When the Sensex was at 21,000, ‘value’ was the least significant factor for many investors as they wanted to be part of the euphoria. As a result, many invested in stocks which had three-digit PE (price to earnings) ratio. The situation now is completely different with few stocks commanding PE ratios of more than 20.

Still, if you have invested in equity with a long-term perspective, and if you are not in need of funds, don’t resort to selling in line with market mood. Stay calm and focused.

(2) Don’t drop long-term goals

The phrase ‘long-term’ has been acquiring a new meaning these days. Investors who entered equity to build corpus over the long-term have changed tracks just because the markets have come under pressure.

If you are an investor with a pre-defined asset allocation towards equity, stick to your portfolio.

Also, remember that equity may have provided 40-50 per cent returns at regular intervals, but the returns actually average out to 15-18 per cent over the long-term due to intermittent corrections.

Still, annualised returns of more than 15 per cent over a period of 10-20 years help beat inflation and build a corpus for long-term needs. 

(3) Don’t just buy to ‘average’

A lot of people around you must be talking about this being an opportunity to ‘average’ out your share price. But you can’t afford to fall in love with a stock.

If you have invested in a momentum stock hoping to get quick returns, and if that stock has fallen below your purchase price, booking losses may be a better option than going in for additional purchases.

Reducing the average price through fresh purchase may be a good strategy under normal circumstances, but 

not in the present bear market. 

(4) Don’t take stocks for short-term

Equity should never be an option for short-term goals, irrespective of the market mood. The stock markets are always volatile and can wipe away a good portion of capital in the short-term.

Besides capital, equity requires a staying power and, hence, is not the best option if you are dependent on the corpus in the short-term

Courtesy :: Economic Times

No comments: