If you want to build wealth, then the share market is a fascinating place to be in. Nifty50, the benchmark index of National Stock Exchange of India Ltd has given an average annualized return of 11.1% from 1999 to 2019. That is very impressive, isn’t it?
However, such high returns can not be earned without taking high risks. The average annual volatility of the NSE markets in the same period has been 24.5%. Hence, if you are not careful about what you are doing then there is a high chance that you may end up with some serious losses.
How do you manage this risk and still make money?
The biggest mistake that most investors make is losing patience. Most of the investors that I have seen in my long years in the financial markets are in a hurry to reap the benefits of the stock markets. They invest and expect to reap profit instantly.
Unfortunately, most of them do not maintain stop losses and suffer when the value of their investments goes down due to a fall in the market or the share prices. As a result, the losses keep mounting and their capital gets stuck in those shares.
On the other hand, when the value of their investments goes up, they do not wait and book the profits very quickly. Therefore, they miss the opportunity to book more profits since they are out of the game when the prices of those shares go up further.
This is a common problem which many investors suffer from. The exit their profitable positions quickly and sit on their loss-making positions forever.
The Solution:
Remember that the stock markets simply love people who believe in it and want to stay invested in it for some time. Trading and investing in shares is like a long-term and viable business, and not a “Get rich quick” Scheme.
Have you ever seen how venture capitalists invest? They choose the right companies and stay invested till the value of those companies go up and reach the right valuation at which they would want to exit. They do not mind waiting for a few years and if required they pump in fresh capital so that the investment grows healthily.
Treat your share investments exactly in this way. You can keep the following in mind:
- Do a thorough research before investing. Use Fundamental Analysis and Technical Analysis to understand which stocks are going to do well in the future and also what is the right time to invest in them.
- You also need to decide upon a time horizon for which the investment will be made and most importantly the target return that you would expect from each investment.
- Allocate your capital among different stocks. If you invest every rupee into a single stock and it crashes then you will have nothing to fall back upon.
- After investing, allow the shares a few years for their prices to reach their true potential. This is extremely important if you want to get great returns from your portfolio. The more you rush, the higher will be the chances that you will panic or take wrong decisions whenever the sure prices show some volatility or go down.
- Talking about share price is going down, it is a common thing which happens to everyone. Do not panic unless and until you feel that there has been any fundamental change in the prospects of the share(s) that you are holding. If you feel that there is something seriously wrong with the share do not wait and exit immediately.
- If the share prices have gone down and you find that there is nothing wrong in the share per se, then you can think of investing some more money into the shares to bring down your cost of investments. If you do not have the extra money, then simply do not do anything. Just wait for the markets to reverse and the share prices to go up.
- When the share prices reach the target return that you expect from each investment (as mentioned earlier), you can think of selling the shares to book the profits. It is perfectly fine to book the profits even if you think that the share prices are going to go up further.
- If you decide to wait and watch at this stage, maintain a strict stop loss always. Otherwise, it might happen that the markets or the share price might correct, thereby taking your profitable position into a loss. I do not even remember how many people I have met who have faced this situation. They waited patiently for years till their share prices reached their target, became greedy and decided to wait some more hoping to earn some more In many cases, the share prices went down and they had to exit their investments at a loss.
Always remember that there at two things that guide the people in the stock market: Greed and fear. I can safely say that these other two emotions that actually cause more losses than profits.
So, keep investing in shares systematically. Hold the investments for a long term and keep a check on your emotions. Thereafter reap the profits and gain the amazing returns which very few other financial instruments can ever give you.
