Don't panic, it could be your best time at the markets

I confess. I flirted with the idea of using the stock market to finance the beach holiday I desperately need but could not afford.

The party that the index kicked off had tempted many like me to ride the wave with a few 'stock tips' that were doing the rounds. Common sense prevailed. I refrained.

If it was that easy to make money, wouldn't we all be sunning ourselves 365 days a year?

My friend Ratan was made of less stern stuff. Swayed by the rising index, he invested Rs 20,000 in a few shares his friend recommended. He waited for his money to double before pulling out.

Sadly, the next day, the market crashed 500 points. He panicked about a further fall and sold low, which not only took away his dream vacation, but a bit of his savings, too!

Where did the poor chap go wrong? Well, in every way.

Unfortunately, he became a poster boy for what NOT to do while investing in the stock market. Let us count the ways.

Rush

Fast is never a good idea and certainly not in equity. Short term goals cannot be met through stock markets. The fundamental rule is, you stay invested no matter what.

Certified Financial Planner Gaurav Mashruwala says, "For financial goals less than two or three years away, choose debt products. You will lose to inflation but the impact will be negligible. For distant goals, choose equity."

Bear with me as I go number crunching.

The table below shows the relationship between the period of investment and the chances of loss. It proves that the longer you stay invested, the probability that you will lose money decreases with every passing year, reaching almost zero at 10 years.

(Calculations based on BSE sensex values from 1979 till 2006)

Panic

It is easy to say don't panic. But let me ask you this: what did you do the last time you saw your money evaporate before your eyes?

Like Ratan, everyone clambers into the market when it is rising.

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Like Ratan, they sell in panic at the slightest dip. This leads to buying high and selling low.

Investment consultant Sandeep Shanbhag attributes it to human tendency, "The mantra is simple. Buy low, sell high. But as straightforward as this may sound, I know from experience that it is one of the most difficult things to do, for the simple reason that it goes against basic human instinct."

Ditch

Astrology and technology have failed miserably at timing the market. We suggest you don't try. History has not produced a single investor who has made money regularly by timing the market.

The solution is simple: invest regularly irrespective of where the market stands.

Go in for Systematic Investment Plan. It means you invest small amounts at regular intervals to help even market ups and downs. You can go in for the SIP route even with the Sensex at high levels because cost averaging works in your favour.

Let's do some number crunching again. The table below compares SIP returns and non-SIP (lumpsum investment) returns of some of the top mutual funds over the last seven years.

(Annualised as on October 1, 2008)

It is easy. SIP beats non-SIP hands down! So get rich, SIP by SIP

Gamble

That is exactly what you will be doing if you rely on that secret tip received from your friend, broker, neighbour or anyone else. You may get lucky sometimes. But for the long run, your decisions need to be based on research, not tips.

Investment advisor Sanjay Matai says, "Focus on the future of the company whose stocks you plan to acquire, not on the share price or some hot news. If you have some information, chances are many others have it too. So the information is already factored into the market price."

So if you are in the mood to gamble, head to the casino next time.

Let me sum it up for you: While the markets may not help you finance beach holiday next year, there is no reason why, with a little planning and common sense, they won't help you buy your own little island by the time you are ready to retire!

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