Mistakes to avoid in the next stock market rally

Mistakes to avoid in the next stock market rally
Mon Jun 8, 2009 9:48am


So many of us made investing mistakes and suffered over the last 18 months.

Everyone makes mistakes….but really smart people learn from their own mistakes and those that other people make. If this is indeed the start of a new upcycle, then now is the best time to review what went wrong the last time so that we do not repeat the same mistakes again.


Read more and get smarter….


1. Don’t be unrealistically optimistic: Markets can come down as well – don’t believe the cheerleaders who only give you the positive picture of markets going up.

Be very suspicious of the so-called experts on TV who are “confident” that a stock or the market will go up. If they are such geniuses, why did they not warn you 18 months ago that the market would go down by about 60%?

Be cautious about any predictions you hear from so-called “Gurus” on the direction of the market, don’t blindly trust what they say. Most “Gurus” have a poor track record.


2. Understand your risk appetite – you cannot get high rewards without taking on high risk: Not all investments are suitable for you, because they might be too risky for your risk profile. There are no get rich quick schemes – the stock market is not a casino, it takes patience, skill and experience to achieve superior returns. If someone promises to double your money in 3 years, be very suspicious.

If you lost money in the last few quarters and were emotional about it, recognize that some of it was your own fault for investing in instruments that were too risky for you to handle. Avoid these in the future, even if the market is racing to the top.


3. There is no substitute for quality: Invest in good quality stocks or mutual funds. Don’t speculate. In a bear market, the speculative names are the ones that fall the fastest. Build your portfolio on a strong foundation. The newest NFOs might not be the safest things for you to invest in, because they are untried and untested.

Its best to be safe and to invest in high quality names. Don’t take a punt on some random tip on a company that has no track record or history of quality performance.


4. Don’t invest blindly – invest towards meeting your financial goals: Don’t just believe what your friends or neighbours are telling you about their investments, these investments might not be suitable for you. Invest because you have a certain goal in mind such as planning for your retirement, or buying a house, saving for your daughter’s wedding or son’s overseas education. This will help you match the right investment product with the right goal.

Everyone wants a return on their investments, but that is not the reason to invest. You invest because you want to do something with the money – marry your daughter, buy a house, plan your retirement. Ensure your investments are allowing you to meet these goals.


5. You cannot successfully time the market: If you believe that you can sell at the top and buy at the bottom, we hate to break this to you but you are not a genius. Its never been done successfully by even the world’s leading investors, so don’t try this strategy at home!

No “Guru” predicted that the market would go up in May 2009 by close to 30%, and not many people were able to time this rise successfully, just like not many people were able to exit the market successfully when the markets first started correcting. Invest regularly but don’t try to pick bottoms and tops.

http://in.reuters.com/article/personalFinance/idINIndia-40003320090608?sp=true