It is now very well known that to create wealth in the stock market, the investor needs to remain invested for a long time. This is a proven truth. The various indices have shown that had you remained invested with your investment without interfering too much, you would have made massive wealth. But this is easier said than done.
The most difficult aspect in the stock market is to sit ideal and remain invested for a long term. Retail investors do not create wealth because they exit the markets too early. Sometimes, the investors become greedy and cuts off their profit too early and sometimes, the investors become fearful and exit when the investment shows a southward trajectory. Also, over a period of time, the investor sells off all his profit generating good stocks and keeps on averaging loss making stocks thus, having a portfolio of only junk stocks. Most of us, commit the same mistake of riding losers and selling winners.
The market will generate greed and fear. Stock investment is more of Psychology and less of intelligence. One who can control his greed, fear and emotions will win. So, how do you balance yourself to remain invested for a long term to create wealth. let us discuss the same in the succeeding paragraphs.
1. Hot Tips; Don't get too involved in the market on a daily basis unless you are a trader. Avoid the urge to chase "hot tips"; resisting the lure of penny stocks; and picking a strategy and then sticking to it.
2. Ride a Winner; Peter Lynch famously spoke about "tenbaggers"—investments that increased tenfold in value. He attributed his success to a small number of these stocks in his portfolio. But this required the discipline of hanging onto stocks even after they’ve increased by many multiples if he thought there was still significant upside potential.
3. Sell a Loser; There is no guarantee that a stock will rebound after a protracted decline, and it’s important to be realistic about the prospect of poorly performing investments. And even though acknowledging losing stocks can psychologically signal failure, there is no shame in recognizing mistakes and selling off investments to stem further loss.
4. Tax implication; Always be aware of tax implications. Too much selling and again buying can attract heavy taxes which you realize only at the time of filing income tax return.
5. NAV Vs Stock Price; Mutual fund investors can remain invested for much longer than direct stock investors because investors never remember the NAV of the scheme but the price of the stock is always there in the mind. So, if your expectations from the market are to earn 14-15% annual returns in the long term, then avoid direct stocks and invest in good quality diversified equity and hybrid mutual funds. Most of us will not be able to beat equity mutual funds returns over a 3 to 5 years time period. 14-15% mutual fund returns are very difficult to beat in the long term. It gives you compounding of unimaginable levels once your portfolio reaches a significant size. After 10 to 12 years, the multiplier effect of compounding takes place and it gives snow balling or parabolic effect in compounding which is huge. Every five years the money is doubling.
6. Reinvesting the Profits; Even in mutual funds, investors book profits in a bull market but are not able to reinvest when the market is down. Stock Market turns around so fast that it doesn't give you any time to reinvest.
7. Booking Profits; If you are investing in stocks then it is a good idea to keep booking some profits to the extent that it gives you a good feeling and to give you a tax advantage (Long term capital gains up to 1 lakh are exempted from income tax). But do this only when your portfolio reaches a significant size. Now, what is a significant size. For every investor it will be different. I think, it should be atleast 2 times your annual income. So, psychologically you are better off. If the market keeps going up, the investor should be happy that the balance of his investments are still growing and he is in the money. And if the market falls, the investor should again be happy that he could take out some profit at the right time and is ready to reinvest. This psychology can make you remain invested for a long time. Make sure, the profit booking should not be too large.
8. If you are investing in mutual funds, the above technique can be implemented to take advantage of the LTCG exemption of ₹01 lakh. If you need money, go and spend but you don't require it, reinvest again in terms of small chunks or additional few SIP installments without waiting too long for the market to fall. The profit booking always makes you happy.
9. Goals; Match your investments to your goals. If you don't have any goal then wealth creation can also be a goal. If you have enough wealth then think of creating bigger wealth for inter-generation transfer of wealth. You can't spend every penny that you generate and have to leave a portion of it to the next generations.
10. Investment Advisor; Last but not the least, an investment advisor can always help you to guide through greed and fear in the market. But for that you need to trust him first. There is no shame in taking guidance from someone who knows more than the normal retail investor. Right choices at the right time can only help you generate wealth in the long term.
We, at INVESTOR FIRST can manage your mutual fund portfolio if you so desire. The process of investment will be online only. It will take 1 or 2 days for registration with us. We will give you an app for monitoring and execution of your mutual fund investments. If you so desire, you may please contact us at the following address:
Website: https://investorfirst.co.in/
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