Tips for Small investors: Don't buy; don't sell!

TODAY'S Stock Market rally has probably caught the small investor by surprise. Having burnt his fingers in a bad bear phase recently, the small investor had exited the stock markets and was only too scared to re-enter. So today's turn of events, the opening followed by circuit breakers, has only made him wonder if he has missed the bus.

Must Read: How to get over the fear of Investing?

If you are among the scores of such small investors, then the good news is, you haven't missed the bus. According to EquiTipz following are some of the questions answered that are popping up in the investors mind as to what the small investor should be doing now.

Question 1: Should you buy?
Answer: No

“Don’t go overboard and buy anything right now; you might fall off the cliff again.”

In the last two months, the Sensex has increased by 50 per cent. However, the companies haven’t made that kind of profits yet. So, there is no basis for you to buy in this rally. A market correction of 20 per cent is expected very soon.

Some Financial Planners mirror this. This is what they have to say. "This rally has been very good. Stability of the government is a good thing, and it has had a positive effect on market sentiment. However, the crucial factors that you need to look at while investing in stocks are how the economy and global markets are faring, and also the performance of companies. Markets will be volatile, so you need to be cautious about buying."

There may be a correction within the next 3 to 6 months and in the range of 15 to 25 per cent. So if you want to buy, go ahead. But do it with a long term horizon. It is also adviced that you space out your investments and not invest in lump sum.

Question 2: Should you sell?
Answer: No

“Retail investors shouldn’t be selling on a day like this. If you don’t need the money right now, there’s no need to sell.”

Just remember the age-old principle of equity investing: You shouldn’t sell unless you have a specific purpose. Why take out money when there could be an opportunity for you to make more profit on a later date. After all, equity is for the long term.

Read: 3 important things to know as a new investor!!!

"If you must sell, then do so if you have made a profit of about 15-18 per cent." Sell only if you must.

Time tested rules of equity investing
Events like these are a good time to revisit time tested principles. So let us re-look at the rules of equity investing:

1. Invest in equities only if you have a long term perspective, that is, you won't have to withdraw for at least 5 to 7 years. If you are clear about this, it does not matter if you start investing in a bull market or a bear market.
2. Withdraw your money only if you need it. For instance, if you have invested in equities to build a corpus for your retirement which is 10 years away, there is no reason to withdraw because of a single day's events.
3. Never invest all your money in one go. Invest in parts. Do a Systematic Investment Planning (SIP). It is a disciplined way of investing irrespective of the state of the market.
4. Diversify your investments.
5. Don’t use the market to make a quick buck. The market is erratic and unpredictable. Nobody has ever timed it perfectly.

Must read: Stock Picking - Which stocks to buy?

When is the best time to invest?

When the stock market is volatile, it can be very tempting to move out. For example, if you think that the market is likely to fall even more, you might consider selling investments so that you can buy them back when they are cheaper. This may sound like a good strategy in theory, but in practice it is extremely difficult. Even expert fund managers who spend all their time watching the market cannot tell for certain when prices have reached either their top point, when it might be good to sell, or their lowest point, when it would be good to buy. The problem is compounded by the fact that markets tend to rise very soon after they fall, and the rises are often concentrated into short periods of time. For example, on 13th October 2008, in the midst of the recent market upheavals, the BSE Sensex leapt by 781 points – one of the biggest one-day rises it had recorded to that point. If you try to time the markets, it is all too easy to miss days like that. Of course, you should always remember that the value of investments can go down as well as up, so you may not get back as much as you invest.

Think about time, not timing

Because it is difficult, if not impossible, to predict how the stock market will move from day to day, Fidelity believes it is time, not timing, that is the key to investment success. By this we mean that the longer you stay invested, the more opportunity you will have to benefit from the stock market’s potential for impressive long term growth. If you put off making an investment because you think prices have further to fall, there is a risk that you will miss out on the significant rises that often occur in the early days of an upward trend. Conversely, if you sell an investment because the markets are falling and the news is full of gloomy predictions about the economy, you may find you have come out of the market at exactly the wrong time, just before the start of a recovery. It is worth remembering that markets tend to move in advance of the economy. In other words, share prices can start recovering before the economy shows signs of emerging from the doldrums. The best course is to choose investments that you feel confident about and take a long term view, accepting that there will almost certainly be difficult times along the way.

Strategies For Successful Investing

Ensure that your investments are right for you

Different investments suit different people at different stages in their lives. And each one has its own level of risk and reward. The basic rule of thumb? The greater the risk, the greater the potential reward. And vice versa.

It is also important to think about your own temperament – if you find it too worrying that your investment might occasionally go down in value, you should perhaps weight your portfolio towards more secure holdings. Here is a broad description of some investment options:

Gold and Real Estate are traditional investments and due to their 'physical' nature are not liquid. PF, PPF, NSCs and Post Office Savings are long term national savings avenues that help you save for retirement besides offering tax benefits. But when it comes to true blue financial investments, there are three main asset classes: Cash, Bonds and Equities.

■ Cash is good for an emergency fund or a short term goal like a holiday, but you may find the returns disappointing over the long term, and you need to remember that their value will be eroded by inflation.

■ Bonds (or loans issued by the government and large companies) can provide better returns than bank accounts but cannot offer the same level of security. Although bond funds do not have as much growth potential as stock market investments, they tend to be less volatile. Investors often opt for bonds when they need to reduce risk – perhaps in the years leading up to their retirement.

■ Equities offer the most growth potential over the long term, but you need to accept that there may be periods when the value of your investment falls sharply.

As the years go by, it is important to check your portfolio regularly to make sure that it still suits your long term strategy. If an investment has done particularly well, you may find that it now accounts for a disproportionate share of your overall portfolio and you need to do some rebalancing. In addition, you will probably need to adjust the weights of your investments from time to time – for example, reduce the amount of risk you are exposed to as you get nearer to retirement.

Keep calm
If you are confident about your long term strategy , you do not need to react to short term movements in the market. You will know that your investments have time to ride out the storm and perhaps even go on to take advantage of any further growth. It is important to be patient with the stock market and to avoid knee-jerk reactions and rash decisions in response to worrying news.

“The worst mistake a private investor can make is to be sucked into markets when they are high and the prevailing mood is the most optimistic, only to then get shaken out at times like this when prices are falling and the outlook is uncertain. It normally takes many years to recover from this experience.”

Read: When is the Best Time to Invest? >>

A place for cash

It is always a good idea to have some money set aside in case of emergencies. Enough to cover three months’ living expenses is often a rough guide to how much you may need. And for most of us a bank account is a safe place to keep cash. It is also useful for short term savings – putting money aside for a new car,a holiday or the deposit on a house. However, with a long term investment, the security of cash has to be balanced against the risk that it will not generate the level of returns you are hoping for.

The spectre of inflation
A potentially more serious threat to your bank account is the damage that inflation can cause. Rising prices could mean that the real return on your savings is very small. For instance, if your account pays 8% but inflation is 6%, you are only making 2% in real terms. You then have to take tax into account – for an investor in the highest tax bracket, this will result in a negative real return. If inflation is higher than 6%, as it is at the moment, the effect on your real returns will be even worse. A reduction in interest rates would also cut into the returns on your savings.

Read: Strategies for successful investing>>

Market Fall - How To Recover Losses?

THE market's blows are only getting harder. The bad news is that the worst may not be over yet. Amidst all this turbulence, only one thing can save you: The right advice.
Here’s how you can limit the damage, straight from wealth's experts.

Scenario 1: I invested in the markets for the short term; what should I do now?

Right now, the markets are driven by global sentiment. And, financial planners reckon that it may take up to the fourth quarter of 2009 for the global market to pull up. On the domestic front too, things may look brighter only in the third or fourth quarter of 2009. "This is mainly because of the huge input costs and high interest rates as of now, " they say.

In such a scenario, you have 2 options:

Option 1: If you are hard pressed for money, you have no choice but to withdraw. PV Subramanyam, financial domain trainer, says, “If you need money soon, say in a year or two, it is better to sell now even if that means booking losses. There’s no way of predicting how the markets would behave.”

Option 2: Sandeep Shanbhag, investment expert and Director, Wonderland Consultants, says, “If you initially invested for the short term but can weather the storm, then wait, provided you have fundamentally good stocks. However, if you need funds, then exit as early as possible and treat this as a mistake not to be repeated.”

Caution: Do not play the markets on a short term basis simply because of the looming uncertainty.

Scenario 2: I am a long term investor: What to do now?

To begin with, relax. If you have invested, you should continue doing so. India has a number of things going in its favour:

-- Among all emerging economies, our export to GDP ratio is the lowest. Consequently, even a full blown US recession will shave only around 40 to 60 basis points off our GDP growth rate, which was a healthy 7.9 per cent for the first quarter. Our economy is fundamentally strong; the situation right now is nothing but a slowdown and it will recover soon.

-- Commodity prices have started to decline, with oil last being traded at USD 90 per barrel. So, going forward, inflation will not be a big threat.

-- Our regulators, SEBI and RBI are proactively taking measures to control the situation and ease capital flows into India.

Long term investors need not worry. In fact, it’s a good time to invest since stocks, expensive at one time, are now available at huge discounts.

Strategy: You can file away a proportion of your money for the long-term through SIPs. If you are single and salaried, put 70 per cent of your money in large cap stocks and the remaining 30 per cent in mid cap stocks. Shabhag suggests that this is an ideal time to average out and make piecemeal investments on every fall. "You can invest around 20 per cent of investible funds into equity / equity MFs. Another 20 to 25 per cent of your surplus can be invested in gold through gold exchange traded funds (ETFs)."

There’s a simple theory behind investing: You invest your way up, and you invest your way down.

What NOT to do?
-- Don't enter the market for a quick buck.

-- Don't look at borrowings for a while, since interest rates are quite high. Especially stay away from borrowing to invest in volatile assets like equities or even property.

-- Avoid investing in Unit Linked Insurance Plans (ULIPs) if you do not understand the scheme in detail.

-- Don't invest in lump sum.

-- Don't stop your systematic investment plans (SIPs), because market fluctuations can average out your losses with SIPs.