It is often debated whether investing money in stock markets and subsequent wealth creation is an art or science or both. While the answer is debatable and may not be conclusive, one this is sure that there are certain guidelines which help the process of investing.
Sharing below 11 important rules or guidelines or principles that investors can apply when making investing decisions:
- Equities by nature have risk. If you would like safe instruments, invest in Fixed Deposits.
- In the long term, equities have outperformed other instruments of investment. The key word is long term.
- Investment in equities should be the capital you do not need in the near future and have a long term horizon – the longer the better.
- Never borrow money to invest in equities.
- Diversify your portfolio in large cap, mid cap & small cap stocks. Good large cap stocks are usually less volatile while mid & small cap stocks have the potential to deliver higher returns. However, they also come with higher volatility & higher risk, unlike large cap stocks.
- Depending upon your profile, the allocation between large, mid & small cap stocks could change. A balanced and growth profile portfolio may have 45% large cap, 35% mid cap & 20% small cap stocks while conservative profile may have 55% large cap, 35% mid cap and 10% small cap stocks, in present state of market. This percentage may change, once positive bias and sentiments returns back, with increase in allocation to small and mid cap stocks by 5% to 10%.
- Avoid F&O & intra day trades completely, until unless you are an expert on the subject and have a very high risk profile. These can be addictive, especially when you get early success, but the gains can get wiped off very quickly. Intraday calls, even with stop loss, are difficult to make consistent gains.
- Do not allocate more than 10% in any one large cap stocks, 8% in mid cap and 4% in small cap stocks. Have around 18-22 stocks in your portfolio, with a well diversified portfolio, with not more than 20% allocated to any 1 sector as well.
- Don’t look at daily stock prices, the market never moves in one direction.
- When share price falls, do not always look to average, just hold on to your investment.
- Book gains, when targets get met.
Hoping this not only helps our members but the retail investor fraternity at large in portfolio building and wealth creation.