Friday, March 1, 2013

The Golden Rules of Investing

What are the golden rules of investing?

It's a raring bull run…

So what does the layman do in times of a roaring bull market? Are there any rules for you and me to follow while dealing in the stock market? What should you avoid doing? And, more importantly, what should you do? Here are some golden rules of investing to follow:

  1. Don't be greedy: Invest smartly, with some professional help and some study on your own.
  2. Avoid 'hot tips': Stay away from 'experts'. Use your own judgement.
  3. Avoid trading/timing the market.
  4. Avoid actions based on sentiments: Don't be emotionally attached to stocks.
  5. Don't panic if the market drops: Hold onto your winners and sell your losers.
  6. Stay invested, possibly continue to invest more: It is natural to book profits with the markets at higher levels.
  7. Buy stocks if there is a 5-8 per cent drop in the market: In this bull market, a 5-8 per cent drop in prices offers you a good opportunity to buy scrips.
  8. Avoid checking the price of stocks or mutual funds after you've sold them.
  9. Avoid penny stocks.
  10. Diversify: We suggest you diversify a bit, looking at stocks, mutual funds, commodities and gold. (I disagree with this one in form at least)
  11. Don't commit large amounts of money: Even if you have a strong risk-bearing capacity, we suggest you do not commit large sums of money at this stage.
  12. Don't trade for short-term.
  13. Don't expect to be a millionaire overnight. Patience pays, so be realistic.
  14. Stick to the desired asset allocation: Asset allocation is the key to successful investing, say experts. Even though equities may outperform debt substantially, it will not be wise to put all your investments in equities.
  15. Distinguish between stocks for keeps and trading: A variation of "never let a trade become an investment."
  16. Buy with adequate margin of safety: That's where attractive purchase prices can help. As a matter of fact, selling stocks is no different from buying them. Keep a sufficient margin of safety when buying a stock and don't rely on making a good sale ever.
  17. Sell when value is realised: If you feel that your investments are adequately valued, you should exit regardless of how long you have held them.
  18. Keep a watch on relative valuations: The real cost of a stock is not the price you pay for it, but the opportunity cost of not putting your money in another one.
  19. If you realise a mistake, exit immediately.
  20. Start investing early.
  21. Try to invest in things you know.
  22. Try to adopt a long-term perspective with regard to investing.
  23. Know your risk: Understand the level and amount of investment you are comfortable with.
  24. Play safe, invest in a mutual fund: For those who are still not sure about their research, use mutual funds.
  25. Encash when stock prices dip: Reduce some exposure, lock in some profits.
  26. Don't blindly follow media reports on corporate developments, as they could be misleading.
  27. Don't blindly imitate investment decisions of others who may have profited from their investment decisions.
  28. Don't fall prey to promises of guaranteed returns.
Note that these rules are universal, and apply anywhere in the world, as they are based upon Human Nature and behavior

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