Worried that your neighbour is making more profits in the stock markets than you are? Wondering how to beat her/him at the sweepstake?
This is the trap that all stock market investors find themselves in when they try to surpass others who make more money than they do.
Ask any behavioural finance expert and they will tell you that this is the biggest mistake that investors make. Apart from this ordinary investors fall prey to a host of other allurements and lose their money as well as their sleep.
Here are 4 basic mistakes that investors should avoid to succeed in making money in the stock markets.
Never buy a stock based on its past performance
Stock markets move in cycles. It goes up during one phase and comes down during another. In short, the stock market follows the economy of a country.
If the economy of a country is doing well stock markets go up and vice versa.
A stock giving more than 30 per cent returns during the last four years stands no guarantee that it will continue to do so year after year. A time will come when returns on this particular stock will dwindle or may even give negative returns.
You get negative returns when the stock price of a company goes below your purchase price. You will lose 20 per cent on a stock if your purchase price is Rs 100 and its market price is Rs 80.
Despite this caveat, the first question that you will ask yourself is how much has the stock price grown in the past few years.
Though, it is always good to know the past performance of a company's stock market price it is risky to base your buy decision primarily on this information.
Beware of stock market experts
When the going is good, all are bulls (advice you to buy stocks expecting prices to go higher after you buy) and you can see most of the market experts doing a happy song and dance sequence about the new peaks that the Sensex and Nifty can scale and how more and more money is entering the Indian markets.
However, when the markets take a reverse turn, everyone becomes a bear (advice you to sell stocks expecting prices to fall after you sell) and you will be considered unfashionable not be on television and rant reasons for doom.
Experts who disappear during rallies (when stock markets move up) suddenly appear on the circuit and start their gloom gyan again. All this compounds the confusion existing in the mind of investors as to what they should be doing.
Don't be unrealistic with your expectations
It will be foolish on your part to think that stock markets can give huge returns every year.
Never be unreasonable with your expectations from the stock markets. Historically, stock markets have given between 15-20 per cent returns over a period of 20 years.
If you think that your money should grow 50 per cent every year then stock market is not the right place for you. Though there are people who promise you the moon the best you can do is keep away from them.
More often than not you will come across a friend or acquaintance telling you how s/he was taken for a ride by believing in unrealistic plans.
Charles Ponzi launched one such scheme in the 1920s. He promised investors to double their money in just 90 days! There is no need to ask if investors lost their shirt investing in such a scheme.
40,000 US investors lost some $ 15 million in a span of few years!
Understand the consequences of failure on your portfolio
Remember that at the end of the day it is your portfolio (number of stocks that you own make up your portfolio) and your money. If you make losses it is you and your family that will suffer because of it.
Your job does not get over once you create a portfolio of good blue chip stocks. In fact, you have to keep a close watch on your portfolio because of the current volatility shown by the markets. Check out the performance of individual stocks over a period of three months, 6 months, 9 months and a year.
This will help you to understand the performance of your portfolio. Normally, investors tend to forget about their stocks once they build a good portfolio. Stock markets being what they are the chances of your portfolio losing money will always be far higher.
Don't put all your money in the equity markets expecting high returns. If returns are high risks are higher.
Finally do not panic and make radical changes to your portfolio. Do a review of your situation, needs and portfolio and see how you can make adjustments to your portfolio if any.
Whatever you do in the end, your ability to sleep well during such volatile times is paramount.
The author is a certified financial planner and runs the Mumbai-based firm My Financial Advisor.