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November 4th, 2019

Are you a first time equity investor?

By Divya Gosain

Get the basics right – start early, start small and don’t act stupid!

Investing is an important life skill. As we grow and start earning, it is imperative we understand and practice saving and wealth creation to meet our financial goals and save for retirement. The earlier we start this exercise, the more beneficial it will be for us. There are many different ways in which one can approach this. We share some experiences and suggestions below to help you get moving and hope that you can start investing for long term wealth creation by adding some equity investments to your portfolio.

 Learn about the subject

“Invest in what you know. Any action without knowledge is useless”

 The first step is to learn about all the different products and their varieties. It pays to understand the difference between investing in mutual funds, SIPs or cash equity (Let’s not get into derivatives and commodities at this point!). When one is new, the suggested approach is to do simple things with consistency and discipline.Based on your financial goals and risk profile, a decision on asset allocation needs to be taken at the very beginning. This however, will be revised many times over time as goals shift.

 Understanding the fundamental valuation of the stocks one has invested in will help to monitor long term selection and also help when some corrections are to be made when fundamentals change.It also helps to do a risk-return analysis using past data for the funds or stocks that you are looking to invest in. One needs to understand that there is always a possibility that one might lose some money over a few periods, so it’s good to be prepared for it. Learning and practising the techniques of diversification, hedging and neutrality will significantly help in reducing the risk of one’s portfolio.

 A common strategy that will back-fire most often than not, is to blindly follow stock picks by big investors. It is not a wise move, as a "one size fits all" investing approach doesn't exist.

In any subject, the best way to learn is by doing. There are many good tutorials and practice platforms available today (both paid and free of cost) for investors to systematically study about portfolio management. A good approach to start would be to learn about systematic strategies, start active investing with mutual funds, practice on virtual platforms for individual stock picking for a while and then move on to putting real money on stocks!

 Patience is your best friend

“Don’t aim for phenomenal returns overnight”

 

Stock market gains come with time. Investing is for long term wealth creation. The rare examples of huge short-term winnings are usually one-off or extremely risky. As an investor, one has to understand (and practice) that more profits will result if we let winning trades run. One doesn’t have to always sell at the first sign of profit. In the same manner, if you are convinced of your idea, and your research seems sound, don’t sell an investment just because it shows a temporary dip.

One behaviour that usually stems out of impatience is to keep investing in a variety of stocks, funds or schemes. At one point of time, such a portfolio with just too many stocks can turn harmful and take you away from your goal of wealth creation. It is therefor, advisable to have a focussed portfolio with less churn.

Over time and with experience, every single investor carves out his own set of a carefully crafted suite of investing rules. Given that each one of us has a different goal and risk appetite, our sincere suggestion would be to stick to the rules one creates. The only thing it will take is discipline and patience.

 

 

Be prudent

“You are not in this to become a celebrity”

There is no such thing as a guaranteed return in equity investments. Anyone who tries to convince you otherwise is not playing straight. Good investment practices comprise of setting up financial goals and then investing regularly and in a disciplined manner to achieve them. The moment one tries to become a millionaire overnight, one is bound to pay undue attention to rumours and honey-traps and fall a victim to loss making decisions.

 It is not always that only bad decisions lead to losses. Most experienced portfolio managers swear by the adage that the market can remain irrational far more that one can remain solvent. So even if your strategy is correct, if you do not have the staying power, it will all come to naught! There is a very fine line between chasing returns, being a little greedy and then acting completely irrational – one requires both the knowledge and the wisdom to differentiate between them and act appropriately.

If something doesn’t seem right, it probably isn’t. And there is no pride in following through with decision when one is not a 100% sure of its correctness. When one is painstakingly managing a personal portfolio, it doesn’t do well risk it on a whim in trying to be a show-off. A 15% return may not be as glamorous as a 150%, but it sure beats having a 15% loss!

 

Do not panic

“This too shall pass”

 

This one is easier said than done. But the truth remains that one possibly takes the worst decisions when in a panic mode. It is only human to literally see red when the portfolio seems to be in a free fall. However, one must remember that a stock market behaviour is similar to life experiences – there will always be ups and downs.

People with less experience in equity investments panic, lose patience and give into their emotions when they witness a downward trend of a particular investment over a short time span. To invest successfully in the market, one has to remove the “emotional” quotient from the decision-making framework.

 Lastly, in certain difficult situations, when you feel that you are not able to handle on your own, consult a financial advisor or an investment consultant who could counsel you correctly and dispassionately. Having an outside view to discuss the situation will help one avoid making silly, but costly mistakes, that inevitably result in a hurry and panic. Once the train is back on track, you can be in the driver’s seat again!

 This discussion will not be complete without touching upon the role of parents and guardians in mentoring and encouraging their wards towards the practice of financial prudence and investment at an early age. Where investing is concerned, the earlier one starts, the better. Youngsters must be taught the principles of financial judiciousness both at home and at school. Once it becomes a part of their routine, it will translate smoothly into their adult lives, especially once they start earning. Today’s younger generation will lead the path tomorrow – in investing and otherwise. Our aim today should be to make them independent, responsible and knowledgeable about earnings, savings and investment. So that the conversation shifts from “Do you even know what you are doing?” to “Can you suggest some recommendations for me?”

 Like most things in life, investing is both an art and a science. Read up well, stay current, stay focussed and apply common sense – chances are everything will go well. Good luck and all the best.

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