Every investor indeed wants to make money out of stocks, despite the experience level. But I would only say that it is easy to fall for its temptation.
It is essential to have a good strategy in place so that good returns could be made. Investing in a stock market is not as easy as it may sound.
It requires patience, passion, and discipline. Also, you will need a good market understanding, the forces at work, and some research skills.
Even though there is no one-size-fits-for-all solution or a sure-shot formula for attainment in the stock market, there are some guidelines I would advise you to follow if you aim to make a decent profit. Below are some essential instructions you may find helpful.
Avoid herd mentality
Your choice to trade in the stock market should not be determined by what your relatives and friends have to say. You should not invest in the stock market because people you know are investing in it as this may not bring results, and as a result, you may end up incurring a loss.
Have a diverse portfolio
When you broaden up your portfolio across your assets, this can help you earn decent returns and that too on a minimum risk.
The level and kind of expansion can be different for different investors, but it may help you respond to fluctuations in the stock market.
Hence, once you become an investor, I would advise you to diversify your portfolio across assets so that it can minimize risks as much as possible
Investment for the long term
You should always plan for the long run which is at least for five years. I know many individuals who have surpassed million-dollar portfolios with the help of this strategy, keeping their investment for 25 years or more.
Go for the best companies for this strategy
You must always go for the companies that have a proven track record of leadership and profitability. You may come across some exciting startups, but they may be a risky investment
Focus on asset placement
There may be some companies that do not give cash dividends. Luckily, some will provide a certain percentage of bonuses to their shareholders.
Both types of companies may still make a good return on investment, but if you are considering an asset placement, then it is essential to know about the business worth investing in.
Also, you can expand your investments and trade in both types of companies, where you can wisely place your assets and optimize a compound annual after-tax return.
Pay close attention to the dividend-adjusted price earning-top growth ratio
This formula can show you if the stock is overvalued or undervalued; in my opinion, this has proved to be a helpful analytical tool. This tool will help you decide whether you should invest in the stock or not.
Take advantage of the time
For inventors with the goal of wealth creation, time can be the greatest ally. Equity has generally been famous for delivering good returns over the long term. The numbers agree. For instance, the average returns from holdings spanning a 15-year period are close to 15%.
Another advantage of remaining invested for a longer period is the power of compounding.
- For instance, if you invest a lump sum of Rs. 5,00,000 today, at a modest rate of return of 8%, for a period of 10 years, your corpus would grow to be Rs. 10,79,462 by the end of the 10-year period.
- Now, if you were to remain invested for twice as long, up to 20 years, your investment would grow exponentially, to Rs. 23,30,478.
Be consistent with your investments
If a lump sum investment is not possible, there’s still another way that you can opt for, if wealth creation is your end goal.
Systematic Investment Plans (SIPs), where you invest small amounts of money periodically, can also help your investments multiply significantly over the investment period.
You can invest small sums as low as Rs. 5,000 in the share market each month. Systematic investments like these not only inculcate financial discipline but also give you the advantage of rupee cost averaging over the long term.
This eventually brings down the total cost of your investment and consequently, increases the net returns.
Diversify and rebalance your portfolio
To create wealth in the stock market, it’s not enough if you make a lump sum investment and wait for it to appreciate. You will need to constantly monitor the market and your portfolio, and diversify it as needed, so you don’t risk all your capital on one or a couple of investments. If those stocks underperform, you could lose a significant portion of your capital.
In addition to diversification, it’s also important to rebalance your periodically. For example, if your original portfolio mix was 70% stocks and 30% bonds, that weightage may change based on the performance of the securities.
Revisit your portfolio periodically to ensure that the original asset allocation is maintained. For instance, in the above example, if the market performs well and your portfolio mix becomes 85% stocks and 15% bonds, you will need to divest some stocks and reinvest the funds in bonds to maintain the original allocation.