Just due to risk attached, many people avoid investments in stock market, but it can offer much more return than a bank account would. Being a long term investor is also not an easy task, as for long term things might be not in your favor. Worst part is many people buy stocks when they are at peak and sell them when the stocks are fighting with their all time low.
Although your advisors provide several suggestions on where to invest, they are not able to advise much when your stock is at its bottom. In such conditions, they just advice to ‘hold on' to the stocks. However, as an investor you need to check the reason behind it and accordingly take remedial actions. Here are few rules which facilitate you to navigate the market and create a huge stock portfolio in a long term.
Diversify your stocks
At the time of investments, distribute your risk in various stocks, bonds, mutual funds and other instruments. Golden rule for investment is not to invest more than 10% in any stock or investment of your portfolio. It is also advised to invest in diverse geographic areas such as Europe, United States, Asia and other promising markets. Diversify to commodity funds, hedge funds and property funds. Through this approach, you will be protected if any of the particular sectors collapses.
Research well before investing
Always consult from various sources before investing. Usually invest in those companies whose strategies and products you like. Nowadays, various websites are available on internet, which help you in analyzing and getting a better understanding of companies. Past performance of any product is not a guarantee for future performance, however it is advised to buy any investment product which has a good record over last few years and which charges low management fees.
Carry on the star performers and sell off the under dogs
Always observe your investments and do compare their performance with the market index. If few of your stocks perform well, then it is obvious to sell them and obtain the profit. On the contrary, if you are going for a long run, then you need to keep investments that multiply your portfolio over long term. So, when you get your winners, treasure and maintain them. On the other hand, you should ditch the under performers of your portfolio. Although one has a temptation to hold them until they bounce back, that is a poor strategy. It is safer to book some early loss rather than a big one at later stage. Never cling on to any stock just for emotional reasons. Always sell the dogs and move along with the stars.
Reinvest your dividends
Amazingly, a big part of the overall growth of most portfolios comes from reinvestment of the dividends rather than from appreciation of the stocks. A 3% yield may sound small but it makes a huge difference over a period of time. Select few investment products which have a solid history of dividends and handle them as ballast on the ship.
Take the long view and always be contrarian
It is always advised to sell off your worst performing stocks when the market is at boom and buy further stocks when the market is up. As you are in the market for a long run, it is advised not to make frequent trades because in this way all your funds go into commission. Do not go along with fashion & fads and smartly diversify your portfolio. Do not panic when the market crashes occasionally as it brings buying opportunities for daring people.
These are few steps which should be followed by investors when they look forward for any investment in the long run. Also, be ready to sell investments when you need them as you save for financial security of your family.
About the Author:
Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent over 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at firstname.lastname@example.org