These tech-savvy app-based equity investors believe in the power of DIY (Do-It-Yourself) investing. As smart as you may be, the stock market is complex and unforgiving. Here are 10 golden mantras (if we may call it so) to help DIY investors go about their trading journey.
1. Start in pieces and start small
This is applicable to all investors but more so to DIY investors. There are two aspects to this argument. Firstly, don’t put into equities more than you can afford to lose. That need not be the case and normally that is not the case. However, as a DIY investors, be prepared for the risks. Secondly, buy and sell in phases. You cannot catch the best price but get close to it.
2. Don’t sulk when the trade goes against you
This is so common because you start with the belief that you must not commit trading mistakes. Remember, even the best of traders and investors get 6 or 7 out of every 10 trades right, at the very best. Making a loss is not the end of the world. Just evaluate where you went wrong and move on.
3. Manage your risk with stop losses and price targets
It does not matter if you are a trader or an investor. Stop losses and price targets are a must for DIY investors. A stop loss limits your loss and protects capital. That is the first priority. Profit targets show money being earned and that can be heady. It also helps churning. There is no smart trader or investor in the world who does not manage risk smartly.
4. Start buying good dividend paying stocks
Why is this important for DIY investors? If you pay Rs100 for the stock and earn Rs6 every year as dividends, 6% is your dividend yield. That is an attractive return. Even if the price does nothing, you can at least hope that the dividend of 6% will give you some returns to look forward to. Dividend yields act as price supports for a stock.
5. Don’t buy a stock because Warren Buffett is buying it
Warren Buffett is just an example of a star investor. There are enough star investors in India that people follow. DIY investors often ask if they can buy a stock since some star investor is buying it. If you are following Warren Buffett, remember that his net worth is $100 billion. His risk appetite is very different from yours, so don’t try and just ape what he is doing.
6. Don’t underestimate the power of Index ETFs
If you are looking to participate in the stock markets for the first time, index ETFs are a great entry option. You participate in a diversified index, risk is much lower, ETFs are low cost and do well over time. ETFs are the best way to get a feel for the ups and downs of the equity market, especially if you are a DIY investor.
7. Take less risk with principal and more with profits
This is an important lesson for all investors but especially for DIY investors. If you bring in Rs5 lakh capital and make a profit of Rs1 lakh in the first 3 months, you must take higher risk on that Rs1 lakh and regular risk on the core capital of Rs5 lakh. That way, you know that losses will not deplete your core capital.
8. Making mistakes is OK, not repeating mistakes
This sounds so generic but we look at a specific case. When you buy a stock and the price falls, the normal tendency is to average. That is like being wrong twice over. The strategy may or may not work, but as DIY investors you must avoid repeating mistakes. If you got a call wrong, you probably missed something. Just leave it.
9. The buck stops with you, especially for DIY investors
This is especially true for DIY investors so take responsibility for your actions. You cannot control market prices but you can manage your risk, so do that. Also, avoid falling for tips and WhatsApp trading ideas. Nobody derives pleasure in making you rich so perish the thought. Even with good advice, learn to do you own reading and research.
10. Remember, there is much more than price risk
Price is just one of the risks and the least controllable. You risk paying too much as costs. You may end up trading and churning too much. You may not protect your trades enough. Higher inflation could eat away your profits. You may end up paying too much as taxes. The irony is that all these risk are controllable. That is exactly what you need to focus on.