Dear friends, first-time investors: you have experienced the joys of a stock market that has risen like a phoenix, driven by seemingly rapid economic recovery in the aftermath of the novel coronavirus pandemic.
Some of you are now tentative, having taken a few “hits” in a volatile market. The environment seems to be shifting from euphoria to caution.
How can you navigate this uncertain, volatile environment and ensure that your portfolio remains healthy?
To keep you out of the harm’s way, here are 10 principles with a list of most common errors investors commit:
1. WHEN to sell is more important than when to buy
• You are emotionally connected with investments that are doing well. You don’t ever wish to sell these winners
• Some investments are running losses for a long time; you are wary of booking losses
• You have not defined stop-loss limits
2. WHAT to buy is more important than when to buy
• You feel timing the market is the most critical factor in investing
• You largely buy stocks that have a low price and that are low P/E (price to earnings). You feel these stocks are cheaply priced and will go up when markets revive. You feel higher-priced and higher valued (high P/E) are expensive, with limited scope for appreciation
3. Never be a FORCED SELLER in a sharply falling market
• You leverage (borrow funds) to invest in markets; to enhance returns in a rising market
• You do not like to keep emergency funds (in a bank account); you like to have your money work for you all the time
4. Buy what can be sold (will have liquidity) in a falling market
• Your stock portfolio consists predominantly of small-caps or mid-caps
• Your other investments are largely illiquid (like real estate, closed-ended funds)
5. Figure out how to deal with PARADOX of investing:
(a) to win big, you must place concentrated bets; (b) to lose less, you must diversify
• You haven’t thought of asset-allocation for your portfolio
• You haven’t defined return objectives and risk tolerance for your investments
6. Markets reflect collective “emotions” of participants
Understanding if their “FEELINGS” are on extremes can be your biggest lever
• You never question if extreme circumstances in markets (highs or lows) seem justified or reasonable
• You think it’s always best to follow the market trend
7. Fear of missing out (FOMO)
You’re likely to commit your biggest (and stupidest) mistakes in this frame of mind
• You find it hard to stay on cash in your portfolio – you cannot resist the urge to participate in the action
• You never assess what could have gone wrong with investments where you profit – what was the risk you undertook to generate that profit, and was it worth it?
• You are obsessed with finding winners; you seldom think about minimizing losses
9. Goal of investing is to secure your financial future – if for you’re in it for the thrill; none of the above apply!
10. NO one knows! You cannot predict, but you can be prepared!
(The author is Head, Investment Management, Edelweiss Wealth Management)
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.