There are scary times for anyone trying to build or preserve their Wealth. Today's roller coaster ride of market with economic ups and downs -- the swings in Sensex is enough to churn stomachs in all but the most steely nerved passengers.
Is this simply another predictable, even healthy, correction in a long-term bull market? Or are we poised for an investor meltdown?
No one knows for sure, of course. Even a modern-day Nostradamus couldn't tell us what's going to happen tomorrow. But no matter what, sticking to these six valuable investment sense will help you to keep your head above today's troubled waters and sail smoothly.
Fluctuations in the market are a natural part of our economic cycle, "When the market is in a downturn, it may seem logical to cash out and go home, but before you do that you may want to think about your long-term goals for that investment."
Market downturns, even recessions, are relatively common occurrences in a economy. A recession is defined as a decline in Gross Domestic Product, or GDP.
Many people sell low and buy high because emotion drives their investment decisions, "Remember, you haven't lost money until you actually sell the security.
"If you decide to sell, buy something else right away. Studies have shown that your investment returns will suffer dramatically if you miss the best days of the market. Nobody knows when the best days will occur, so stay invested."
In short, investing for a financially healthy future still calls for the same kind of common-sense approach that has worked so well in the past. Most experts predict that the long-term future will most likely mirror the long-term past. That is, a steady pattern of economic growth with periods of expansions, recessions and downturns in the market.
In an effort to sell newspapers and air time, the media trains investors to look out for the next economic number of the day, "Whether it's employment numbers, capacity utilization, Euro Crisis or inflation statistics, there is always a number of the day to tempt investors into overreacting. In reality it is nonsensical to react to daily economic reports. No investment strategy is better than identifying superior companies and holding them while letting your money compound over time."
Some of the world's most successful investors made their fortunes by buying when everyone else was selling. But that's not easy to do. Investing steadily during market downturns may be too much of a psychological adventure for most of us, but there is a system that enables almost anyone to take advantage of those tempting buying opportunities. It's called Rupee-cost averaging.
"Rupee-cost averaging calls for investing a fixed amount each month or quarter on a specific investment or part of a portfolio, regardless of the ups and downs of the share or unit prices," By following this pattern consistently, you will purchase more shares when prices are low and fewer shares when prices are high.
For example, if you decide to invest Rs 5000 each month on purchasing shares, you will be able to buy only a few shares if the price is Rs 1000 per share. However, if the price goes down to Rs 500 the next month, the same money will buy twice as many shares.
By making regular and consistent purchases over a longer period of time, your cost basis -- the total amount you pay for a security -- is spread out. That provides a cushion against normal market price fluctuations.
Rupee-cost averaging is a time-proven and effective way to minimize the effects of emotion in financial management.
It's better to invest regularly, without regard for the general condition of the economy or the direction of the stock market.
“Timing the market, trying to determine the best time to buy specific stocks, rarely works”. You might get lucky once in a while, but your luck isn't likely to last.
"Market timing and day trading are for suckers. The financial press or stock brokers makes money from advertising and churning, and they do that by keeping you breathlessly chasing the latest tip. They make money whether you win or lose."
Waiting for stocks to hit the "bottom" before you buy or hit the "top" before you sell has long since proven to be a loser's game for investors. Select the stocks or mutual funds that you buy only on the basis of sound fundamentals.
If there is one point that virtually all financial advisers agree on, it's the critical need for you to maintain an asset allocation suitable to your personal circumstances. Asset allocation refers to the process of dividing your investable assets among equity, bonds, gold, Real estate and cash.
The diversification mix that is right for you at a given point in your life will depend on such things as your age, goals and your tolerance for risk.
If your retirement is years away, most experts recommend relatively heavy investments in equities, 60 percent or more of your total portfolio. "However, if your time horizon is less than three years," stay in fixed investments like CDs, short-term bonds and money markets."
Once you allocate your assets in the manner right for your circumstances, it's important to rebalance at least once a year. As the price of equities goes up or down, the ratio you have established will change. If the value of your equities has risen, you may want to sell off some of them to restore your original ratios. If their value has dropped, moving more cash into equities may be appropriate.
If it is regular, taxable money, consider at least annually, perhaps more during extremely volatile periods. For a rebalancing strategy to work, you must own assets that don't react the same way over differing market conditions.
"Creating a plan such as Rupee-cost averaging and sticking with it under all market conditions is the way to maximize your returns," Human nature makes it difficult for the average investor to stick to an investment strategy unaffected by emotion. Sometimes it's fear; sometimes it's pure greed. Either way, allowing emotions to affect your investing decisions is certain to damage your financial future.
It's human nature to chase hot sectors that have already made a significant move, It's also natural to panic and sell-out when everyone else is doing the same.
While it may be the natural thing to do, it's not the smart thing, "It's important to have an investment strategy or Financial Plan and stick to it. Remember: If the headlines are full of it and everyone else is doing it, you're probably too late."
There is, of course, much more to the maintenance of an investment portfolio that may well help you sleep during these scary investment times. However, sticking with these common-sense fundamentals will go a long way toward achieving that end.
Happy Investing !!