Are real life situations and financial decisions assessed for risks in a very similar way by investors? There are parallels but they are not always handled similarly. Here are some anecdotes with some pertinent personal finance lessons, that helps us understand the differences in the choices people make in real-life situations, vs managing their money.
Read our latest article, published on Moneycontrol.
Enough has been spoken about the markets in last few months, including the never-seen-before kind of drops and recoveries. In such times, one would have assumed that retail investors would have beaten a hasty retreat, hoping to come back when markets seem a bit saner.
Surprisingly, that is not the case. The below 2 published data points indicate otherwise.
New demat account openings for most brokers have surged, with anywhere between 50 to 200% increases being reported, many of them first-time users.
Retail investors took advantage of the available time (due to the lockdown) and the valuations (in March & April post the ~ 35% crash) to enter and invest in the stock market to make some “quick” returns
Considering that the bulk of these new additions are online, it can be presumed that the average new investor is young and technology-savvy, while not afraid to take risks while seeking to make a quick buck
Is this good news? Well, it depends on how one looks at it. History indicates that institutional investors are generally smarter than retail, who usually enter late to the party. The average holding returns of mutual funds is significantly higher than the average investor returns in the same funds, underscoring this fact.
On the other hand, the fact that the market participation is broadening and that too in times of market distress is heartening and shows some maturity in the mind of the average retail investor. This millennial generation is possibly different and smarter than its precursors. They are also adopting the new “do-it-yourself” way, already popular in developed countries.
That said, trading in the stock market for short term gains is fraught with risks, and can result in substantial capital loss, if one doesn’t have a good hang of what one is doing. Having an Investment Framework based on the following 4 levers can possibly help today’s investor to increase his or her chances of success in the stock market.
Strong Knowledge-based Investment Hypothesis
Know each stock you invest in. Spend time on research, make sure you understand the company and its prospects, and do not get lured by tips and penny stock advice. This is fundamental to your framework and dilution here is akin to having a rotten foundation, leading your structure to fall, sooner or later.
Laid-down Investment Horizons & Goals
Even the best race-car driver needs a destination, a target. Similarly, map your purchase to an outcome based on your investment hypothesis, with a time-horizon in mind. Tie it to a goal, so that neither does your horizon become a moving target, nor are you tempted to exit early during adversities, impacting your goal.
Clear & Documented Process for Exits
Based on your investment hypothesis, you will know when you need to book profits, in case your target/goal is met. Similarly, however good your investment hypothesis might have been, factors change and hypotheses fail. So have a clear plan to exit in case things don’t play out the way you saw them. Having a documented process for both value-based and time-based exits, with clear rationales, is a good way to both, limit your losses and not fall in love with your darlings.
However good your stock selection maybe, expecting each to be a winner is unreasonable. Diversification is a hedge against both, failed hypotheses as well as capital loss. Build a portfolio of 15-20 stocks over time and have a cap on each stock as a % of your portfolio. 6 winners out of 10 is a good enough ratio for the portfolio.
Dear retail investor, Success in the stock market is an outcome of 3 factors – Relevant Knowledge, Robust Process and Resilient Temperament. Please use the above-mentioned levers to build a personal Investment Framework and whenever you feel swayed by emotion, go back to it and read it. You will find that not only is it helpful in the stock market, but in everyday life too. Happy investing!
Image credit: MayoFinance, Unsplash
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A slightly modified version of this article was published recently on fpstudycircle.com.
The much-awaited festive season comes to an end and it has managed to rekindle hope and bring a lot of joy despite the restraints this year. Diwali has always been the most exciting time of the year for me and preparations for the festival start much in advance every year.
The customary “Diwali cleaning” is something I usually delegate to the willing and efficient staff and am usually pleased with the result of a superficially extra-clean house for a few weeks. This year, I decided to do a lot of the customary cleaning myself and I was surprised to take away some financial lessons from this exercise.
Read our latest article, published on Moneycontrol.
We are now deep into the festival season, and normally, it would be visible, through the familiar sights and sounds associated with it. This time around though, things are different.
But one thing hasn’t changed much and that is us waiting with bated breath for Sale Season. Offline or Online, there is something about Sales that get us going. We are inherently deal-seekers, and good deals get us all pumped up.
Unfortunately, the same cannot be said of our actions when it comes to our investments in the markets. The same shopper as investor feels more comfortable entering the financial markets when markets are at highs rather than at lows. And panics to sell assets at a loss when there is a market crash, rather than buying more.
Read on to know more in our latest article, published on Moneycontrol.
Have you ever wondered, when you are planning for your future, why certain assets evoke so much loyalty and attachment? Come to think of it, you may have invested in it dispassionately in pursuit of good returns but somewhere along the way it has acquired a persona of its own.
Real estate and gold are two such assets which have a huge emotional connect. Gold is understandable, as in our culture, if you are selling physical gold, people assume that you have hit really hard times and it is never easy to part with physical gold. Other forms of gold like Gold ETFs etc. luckily are easier to deal with.
But what about real estate? I cannot think of too many people putting their life savings into a financial asset and staying the course despite hiccups and abysmal returns. Why then is real estate treated differently?
Read our latest article, published on Moneycontrol
In the last couple of years, there has been a lot said and done with respect to categorization of mutual funds. The regulator has attempted to put some structure in place for fund houses and managers through the categorization guidelines, in order to help investors make informed choices.
That said, it can still be quite confusing for the lay investor to understand these categories. Thankfully, there is something else that is universally understood. Cricket! And within it, IPL!
Fans know every team’s strengths and weaknesses while having his or her favourite teams to root for. So, if equity mutual fund categories were IPL 2020 teams, who would they be?
Read our latest article, published on Moneycontrol.
Building a good diversified portfolio is a journey, not a one-time action. It is not a straight-line process either, and many a times, involves taking a step or two back as well, while the overall direction is forward.
As planners, this is something we do periodically, in order to exit assets, which we feel are not well-poised for the future and move to investments which are more aligned towards the goals and expectations. While one would think that conversations for making such changes in portfolios would be easy, many a times, they are not.
Here are a few pointers for you to ponder on, so that your portfolio review exercise ends up cutting your weeds and nurturing your flowers.
Read our latest article, published on Moneycontrol, to help you build a portfolio that resembles a bunch of roses and not a bush of thorns.
The last few months have seen market volatility at never-seen-before levels. We saw the sharpest drop ever, with nearly a 30-35% drop in key indices less than a month. Yet, before one could even say “bear”, the fastest-ever recovery also followed in the next 3 months, with most indices recovering smartly from their March bottoms, to be close to their pre-COVID highs.
For customers, emotional reactions are completely understandable. On one hand, there is loss-aversion at work, and on the other, there is the fear of missing out, or FOMO.
So, coming back to the question, how does one handle such situations? Is there a way to navigate markets, especially when they go through such roller-coaster rides?
Read our latest article, published on Moneycontrol, to help you wade through this emotional jungle and take the right decisions.
Have you ever had conflicting emotions regarding the same issue? It seems to happen quite often to me when I look at the ways in which senior citizens handle their money. At times I feel, I wish I could be as well planned and involved with my own finances. At other times I roll my eyes and make myself a promise never to end up like them when I grow older. I guess its only natural that there are somethings which you envy and some which you absolutely detest and don’t want to emulate ever.
This my attempt to list down 3 things I would love to work on with the older generation as an inspiration and 3 things I would want to do differently than them for sure.
Pl read our latest article, published on Moneycontrol
For most people, the last few months has been a never-before experience. Whether it is about finding out how secure is your financial position in this crisis, or about understanding what is really important for you versus isn’t, or about looking for new opportunities in an otherwise generally hopeless time, it has been a period of discovery.
For me, this period has reiterated a few money lessons which I have learnt and personally tried to follow over the last few years. If anything, this crisis has confirmed to me that the path towards financial, in fact, overall well-being lies along successfully practicing these lessons.
Read about them in our latest article, published on Moneycontrol.