Tuesday, January 3, 2012

Mistakes to avoid in 2012

2011 is history! It was not a good year for investors—both domestic and foreign. Nifty lost 21% during the calendar year. The general consensus is that the market is likely to remain lackluster in near to medium term. A sense of despondency has enveloped the equity investors.
However, this does not mean that you should stay away from the market. You may not know when the market may stage a turnaround. Many investors—including the savvy institutional investors—were caught off guard in 2009 when the markets posted handsome gains (close to 90% returns) after tanking in 2008. History has proved it time and again that serious money can be made only by serious and focused investors—never by traders! Making money or more aptly creating wealth is a serious and boring business.
However, you should tread cautiously to get the most out of this market. Here are some pit falls that you may avoid in 2012.

Don’t buy a stock or a fund because it is cheap

Majority of stocks and funds have borne the brunt of the downfall throughout 2011. For example infrastructure stocks and funds have seen serious erosion in their valuations. However, this does not mean that you should go and buy all of them. You need to do some serious research if you are investing in stocks, or rely on the expertise of a fund manager-- if you access equity market through the mutual fund route-- if he has a proven track record. If you do not have the risk appetite than you should confine yourself to a regular diversified fund rather then sector specific funds. While the latter can give you above average returns in bullish times; they can fall sharply in bearish times also. They tend to be highly volatile on either side. Not more that 5-15% of your corpus should be invested in such sector specific stocks/funds provided you have conviction in the sector over long term.

Don’t Panic

Do not press the panic button and sell off your holdings should the markets decline further even from current levels. Markets take their own time to turnaround. Agreed that things are bad on the economic front, but Indian economy is still far away from being written off. Remember, the night is the darkest just before dawn. Just as markets usually do not factor bad news in bullish times, so too it ignores good news in bad times. Consider the following:-

·      Doomsayers may point out that Indian economy may be growing at a lesser pace (from 9% growth    rate in recent past to 7%-7.50% presently) and hence investments in equity market should be deferred. The rate of growth may be slow-- albeit it is growing! Mind you 7--7.5% is still a very decent growth rate from a global perspective. 
·    According to business publications, manufacturing activity in India climbed to a 6-month high in December 2011. IIP expanded sharply at 6.50% in November this year after showing a 5% degrowth in the month before.
·     Auto companies have shown robust growth in numbers for December 2011.Overall car industry grew 9% in December compared to a 7% growth in November this year. And that too in a high interest environment.
·    Corporates have shown a growth trajectory in profits even if it is lower as compared to earlier years.
·       RBI has indicated that it will focus more on growth rather than inflation. It has also re-iterated that it may not go in for any more rate hikes—rather it may look at reducing rates if inflation starts to moderate.

Discard trader mentality

One common mistake that investors make is that once they buy a stock/fund, they expect it to go only in one direction—up. Markets do not move as per our wishes. Remember, it is not your thinking that makes big money, it is sitting. Investors, who had sold out in panic during the 2008 fall, are still licking their wounds. However, those who had bought into the panic laughed their way to their banks. Differentiate between long term investing and short term trading. Rs. 1 lac cannot become Rs. 50 lacs through trading! Long term investing is the only route which can multiply your investments, maano ya na maano!

Don’t stop your SIPs

SIPs are usually the first victims during any market downturns. Investors more often than not discontinue their SIPs while holding on to their stocks (even if is a losing proposition). SIPs are an excellent way to accumulate units at low prices and in the process lower your average holding cost. It has the power to evolve as a second earning member of your family—even when you stop earning! While lump sump investments have an element of timing involved, SIP eliminates the risk of market timing. One common query that we face during out interaction with our investors—current and prospective alike—are: - My SIP has completed 1 year. Should I stop now, since market is not looking good? There may be a period of under performance in say a fund or stocks. That does not mean that you discard them. Consider the following returns matrix showing returns of a broad category of mutual funds for the period 01/01/2008—30/12/2011.The Nifty during this period gave a negative return of (-) 7% CAGR approx during the same period.
Mutual Fund Scheme
SIP returns
Non–SIP returns (CAGR)
BSL Top 100 Fund
(-) 4.90%
DSP BR Top 100 Equity Fund
(-) 2.63%
Franklin India Blue Chip Fund
(-) 0.94%
HDFC Top 200 Fund
HDFC Equity Fund
(-) 0.66%
IDFC Premier Equity Fund
ICICI Prudential Discovery Fund
DSP BR Small & Mid Cap Fund
(-) 4.02%
Reliance Equity Opportunities Fund
(-) 1.55%

The above table proves that SIP is the vehicle not only the right strategy to beat bearish market, but also a right vehicle to create long term wealth over long term. After all investments are done with a view to meet your life’s long term goal, be it children education and/or marriage, your own retirement etc. Another argument in favour of SIP is that since your income is monthly, then why should your investments be lump sum or one time? 

Get your asset allocation in place

One of the most basic principles of investing is that you should not put all your eggs in one basket. No matter how bullish you may be about a particular asset class. Even financial planners like us recommend asset allocation to our clients and sticking with it. Prudence suggests that you should diversify your investments across different asset classes viz; equity, debt/fixed income, gold etc. A portfolio so diversified will not only be less volatile but also maximizes your over all portfolio returns. Returns are important, but so are your goals too, fulfillment of which depends upon your judicious investment strategy. (Refer our earlier article on “Why investors must look beyond returns of 04/2/2011—the same has been uploaded on our blog:-  http://www.investwithaims.blogspot.com/2011/02/why-investors-must-look-beyond-returns.html). 

Wish you a prosperous and safe 2012!!