A few years back when I started investing in stocks the only knowledge that I relied upon was my gut feeling. If I have heard the name of the company and if it was something good that the company achieved I invested a small amount in the stocks of that company.
This was the time when the market crashed , Lehman Brothers collapsed and I saw my portfolio in red. But I still felt that the companies that I invested in was good and I bought a few more shares hoping that if it goes up my losses will average out. In investment term we can say I was following a contrary strategy.
Deep in 2008 and early 2009 I continued to invest. By mid 2009 I ran out of money and sat down hoping that the markets will rise.
The markets did rise and soon I was seeing my portfolio was turning Green. It was just a matter of time I saw super profits on all my stocks. I started selling my stocks and I was so happy that I have more than doubled my money in capital gains. But then something happened and I felt sad. The markets went up further in late 2010 and early 2011. I could have potentially become a millionaire if I had just held on to my shares.
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Well the above is a personal experience and not a story. Nearly 80% of the individual investors have little or no clue how to invest, when to invest and where to invest. That is why they invest in portfolios like Mutual Funds which diversify the risk. But many people end up buying similar kinds of MFs thinking they are diversifying but in reality the MFs may not have a very different portfolio.
Now lets advance from the stories of the past and look into the future. If you have say some money to invest which is the best investment and how much cash to have?
1>
a> What type of an investor are you ?
20 days - An investor who has a lot of time to study investments and study day to day closing prices.
50 days - well at least keeps track of market and reads the newspapers or the internet for a few hours once a week
100 days - A 100 day investor really can tell only if it is bear or bull and has very little idea of when to enter or exit. Maybe checks his demat account once a month and reads the newspaper for the finance column if it appears in the headlines
200 days - Well a 200 day investor has no idea of finance and has only a little bit of money to invest.
b> What is your Risk appetite . You can use Age as a surrogate.
Age 20-30 -> Equity exposure 80 %
Age 30-40 -> Equity exposure 60%
Age 40-50 -> Equity exposure 40%
Age 50-60 -> Equity exposure 20%
2> Once you identify what kind of an investor you are , keep aside as much cash as you need from your savings for that many days.
For example a 100 day investor should keep aside 100 days requirement of cash ( his house rents, approximate bills, Bank EMIs etc)
3> Now lets assume you have got 100,000 to invest. Well for starters lets invest in something that is really safe and sound.
Find your Risk Appetite say you are aged 30-40 years invest 40% in safe bets
i> Public Provident Funds
ii> Infrastructure bonds
ii> rest in Gold , Silver and other precious metals
etc. I won't say land/house as that has got several other associated dependencies.
4> Now lets come to the interesting part - equities. Well there is a decision to be made. How much to invest in MFs and how much to invest in pure stocks. Well that again depends on what type of an investor you are.
A 100 day or 200 day investor would do best to choose Mutual Funds. The best way to invest would be in SIPs
Whereas a careful investor like a 20day or 50 day investor can try to balance between stocks and MFs.
5> Now the all important question. What MFs to invest in ? Forget all the names and go to a good website and check which are the top Mutual Funds now. Decide on a minimum budget per MF and choose 4 to 5 MFs . You will see that equity diversified MFs give the best returns anytime , so forget the rest and invest in these. There is no point in looking at debt or other types of MFs. Debts are safe and you can safely buy National Saving Certificates( if those are still around) without going into MFs. Avoid ULIPs altogether.
Invest in monthly SIPs , not because the returns are calculated as higher in some websites with low confidence levels , but because SIPs will allow you to play with limited amount of money for longer period of time.
Make sure you check these things
- The portfolio of companies ( otherwise you may end up investing in identical portfolios just different names)
- Some basic check on the financial institutions who invested.
6> Now lets try to find out what are the best stocks to buy. There can be many methods to do a tech analysis , but do a gut feel analysis .
- Is the company a robust company or not ,say increasing profits every year. Is the business a growing industry or a consolidating one ?
- Is the company a good company or not , say clear of regulatory or ethical issues
- How much debt the company has compared to equity
Just with a few good names that has the potential to survive a recession buy stocks
7> How to reduce risk by diversification
- Try to buy stocks from a few different industries that are stable in nature. There is no point in trying to buy stocks from every industry just to diversify. The correlation advantages stops beyond a point.
8> Well so far so good but one important question is when to sell
First find out about the Nifty 50 . Then see if the stock is outperforming the Nifty or at least performing with it when the market revives. If the stock lags behind and drops even as Nifty rises that means it was a bad investment , sell it just to cover losses. For all other stocks that are with the Nifty just keep a weekly watch.
As soon as Nifty Top 50 crosses or overshoots there will be a correction and it will come down.
Sell 25% of the stocks
If Nifty continues to come down sell 50% , otherwise hold.
If Nifty comes down further threatening to wipe out profits sell the remaining 25%.
If however Nifty recovers sell within 6 months or 1 year to invest on other growing stocks.
Now, all that seems so simple may not really be so simple. But once you are on profit in a bearish market the next step will be to do a Tech Analysis . That will be fodder for another Post.
