Imagine buying a stock at Rs 100, probably on the suggestion of a friend, neighbor, aunt, girlfriend, hoping to double, triple your money, touching the lunar surface in no time…

And then,

80,70,50,25,10,5 …..What the hell is happening? You question all deities you pray to as to why this is happening to you. And the final stage: investor and advisor resort to desperate measures as panic sets in quick and fast.

Sitting in front of their computer screens pressing that F5 key again and again believing against hope, hoping against hope, investors dig for some divine intervention that will move their stocks price up. The friend’s stock is up; the aunt’s stock is up, while our pal is still pressing that Refresh button hoping to make a killing. Let’s put him out of his misery, what?

It’s not going to happen.

It’s never going to happen

Unless you realize that you have made a wrong stock pick without knowing if that company makes pajamas or refines crude oil.

In times like these, when 15000 levels on the BSE Sensex seems folklore, your broker is pressing you to put money in a new rising star company, which might be a shooting star very soon. You don’t know. Fact is, nobody does. In markets like these, you don’t know what stock to buy at what levels because the benchmark index is at 9-10 PE on FY09 earning (PE is prices to earning ratio, which gauges how expensive it is to buy index stocks in comparison to other markets in the world, on the basis of earning). The best option is to be sold and stay put. The advisories and advocates of the stock markets burp out levels at which you should buy, hold, go long, go short,  specific stocks,… They are as clueless as you are as soon as one variable changes, be it interest rates, earnings of the company, and so on.

The Indian economy is not running away anywhere. Neither is the stock market. Having grown by near 9% average for the last 5 years in a row to reach $1 trillion in GDP (It’s about $700 billion now, due to FII money exit and rupee devaluation), the economy cannot and will not sink like the Titanic. It has a mass of over 1.3 billion people and with 240 million households, demand surely exists - for consumer durable and FMCG companies, for roads, bridges, dams, power, and what not. So consumption spending is surely there. What is missing is investment spending; this will take sometime from an individual’s point of view as the current interest regime is too high.

All the above-mentioned demand areas requires $100 billion of investments annually for the next 5 years. Let’s say FIIs might be able to pullout about $20 billion ($12 billion has already been pulled out this year so far). The numbers are still more than sufficiently optimistic to drive our economic growth.

To fuel all this government will surely relax investment norms in key critical sectors like railways, telecom, banking, airlines. So our growth story is still visible and we will surely see a ray of light at the end of the tunnel.

So all investors, new or old! Stop pressing that Refresh button and dig in a little deeper when you invest.

The author is working as Research Associate at Padmakshi Financial Services Ltd.

Inflation is a money eater that reduces your purchasing power. For instance if the average rate of inflation is 8%, you need to make sure that your investments are earning a minimum of 8% or more, post-tax. Let us assume an investment portfolio of Rs. 1, 00,000, earning returns at 10% and inflation at 8%. The returns in this case would be Rs. 10,000 gross annually, with the net after income tax Rs. 7000 (Assuming you are in the highest tax bracket of 30%). Now if you account for the 8% inflation specified (8000, or 8% of Rs. 100,000), you are left with Rs. -1000 (Return of 7000 minus inflation of 8000)! The best way to grow a retirement corpus is to have a diversified investment portfolio according to the asset allocation designed for your risk profile. An ideal one would be 40% equity (blue chip), 50% debt, 5% gold, and 5% cash. Equity would help appreciate the retirement corpus. Debt investments would provide for regular income and gold would act as a hedge to inflation and equity turmoil. The recent equity market downturn was the perfect example for gold to stand out as a surge. Selective equity investments made for the long term are more often than not investments with high returns.

Equity: Do not sell blue chip stocks when the value increases. This should not be done when you planning for retirement. These stocks provide for the regular incomes by the way of dividends. At the same time if the dividends paid by the companies increase, it will reflect positively on the stock price too. The most crucial aspect that we never consider in an investment is the dividend that companies pay. We always look at just the capital appreciation. Dividend income in India is tax-free. The dividend payouts by all good companies grow proportionate to the growth in the net profit. It means that if you stay invested, your equity dividend income will keep growing year after year, compounded. If you think that the return on your capital is tiny compared to your investments, just be patient and watch out for a few years. Lets assume that your company’s dividend payout grows 20% year on year, in 10 years your dividend income will jump by more than 6 times and in 20 years it will go up by nearly 40 times. And if you consider the occupational windfall gains like rights and bonus issues, your dividend income goes up in compounding multiples over a period of time.

Your Investments should perform better than the market: Is it easy? Yes quite possible. The Bombay Stock Exchange has approximately 3000 shares listed on it but its index, the Sensex, is a weighted average representation of just 30 stocks. So, if the Sensex falls it is an indication that the heavy weights from the 30 stocks fell; not all the 3000 stocks. If your investment portfolio is to beat the Sensex, they will need to have a Beta more than 1. The Beta is a measure of sensitivity of a scrip movement relative to the movement of the benchmark index (in this case, the Sensex). A Beta of 1 means that for every 1% change in the index, your scrip moves by 1%. The caution here is that when you have a Beta of more than 1, your investments will also fall faster than the Sensex fall. Investments in stocks can be very rewarding but with high risk.

If you lack knowledge let mutual funds take care of it: I believe most of you investors who lack knowledge should rely on mutual funds, not individual common stocks. This is not because I think your performance will not be better; rather I think it will be easier for you to operate and will allow less potential for a catastrophe. Investments in mutual funds are managed by professionals who understand and study all the critical aspects before investing your money. This will help in proper diversification, but be sure of you choosing the right scheme to invest in as per your risk profile and aspirations.

Let your debt investments comprise of Government securities and highly-rated bonds (AAA): The most important component in a diversified portfolio is investment-grade fixed income. High-grade bonds and full-faith-and-credit-pledge government securities are the most reliable fixed-income counter balancers.

The balance between debt and equities is a function of (1) your age - the younger you are, the larger your equities percentage; (2) your financial resources; and (3) your need for current income. No two investors have exactly the same risk/reward profile.

Once your debt investments are in place, you need to make adjustments and additions from time to time depending on your changing needs and available new cash for investment. But you should keep rebalancing the portfolio according to your asset allocation strategy once a year.

Biggest mistake is investing based on events: You should never make investment decisions reacting to short term economic indicators or performance. You should build long-term wealth by investing in good companies with strong balance sheets and a history of paying and increasing dividends, and then you remain patient. You don’t jump in and out of stocks based on quarterly earnings reports. Base your investment program on business cycle trends, not market noise created by events.

You should not make many changes to your portfolio in the course of an average year. You should add money to some positions and tinker with others. You should not run from one idea to the next each time the economic wind changes direction.

I would like to urge all the investors reading this to begin weeding out your portfolio’s deadwood. Simplify and organize your investing, and practice the basic rules. As you start to see the profits rolling your way, you’ll be glad that you took the time to read this article to lay a solid investment foundation.

Kirtan Shah, a Certified Financial Planner, is a partner at AmbestinQ Consultancy Services.