How to derisk your stock investments

The first basis requirement is that you at least know what is a stock, what is investment allocation, what’s a mutual fund, what’s an ETF.

June 20, 2015 11:52 IST | India Infoline News Service
Stock investment and risk aversion do not quite go hand in hand. But even for the acutely risk averse, there are ways to invest in stocks without taking too much risks.

The first basis requirement is that you at least know what is a stock, what is investment allocation, what’s a mutual fund, what’s an ETF. Unless you have a basic idea of these instruments and how they work, you leave yourself exposed to all sorts of misguidance and misinterpretations that can only lead to losses.

The second imperative is to broaden your horizon. This has two meanings. Broaden your horizon to different stocks, sectors and also companies of different sizes in order to bring in diversity in your portfolio. The other thing is to broaden your investment horizon, so that you do not get caught in the short-term bumps of the market.

The third thing is to keep your costs low, which can be a surefire way to reap higher returns. Over time, tiny percentage charges and or small fees add up. Going with index funds and ETFs can keep your costs low compared with direct equity investment or even an equity mutual fund. An index approach can also give you access to diversified assets, which means you’re not at risk of one company going bankrupt or falling out of favour with the market.

The fourth is the usual thumb rule that the market guys keep talking all the time: don’t try to beat the market; participate in it. In trying to beat the market, investors usually underperform not just the market, but even the investments they choose, because they buy and sell at less than optimal times.

Create a portfolio diversified across different asset classes — largecap, midcap, smallcap, domestic, international, developed, emerging markets. Also, depending on how far you are from retirement, or how much risk you want to take, you should recast the portfolio to give your portfolio more buffer.

Be willing to lose all your money in stocks. Ideally, it should be an amount of money that you don’t need to achieve your goals no matter what. Sounds like a crazy idea, but when you have such an approach, you can ensure that your portfolio is immune to the jerks of the market. 

Lastly, use common sense. If the population of the country is increasing and there are only four big hospital chains, they will have to grow bigger with time. Nobody can live without medicines no matter how bad the recession is. If it’s raining job for the young, bikes and white goods will sell more. When the summer is harsh, AC makers’ books are bound to swell. So, these are common-sense investment ideas. 

Yes, you do need to scrutinize closely if a company has huge debt load in its books or there is an extra tax burden coming on an industry, but by and large if you have your ear to the ground, your instinct will work. And that will bring in returns too.

FREE Benefits Worth 5,000



Open Demat Account

  • 0

    Per Order for ETF & Mutual Funds Brokerage

  • 20

    Per Order for Delivery, Intraday, F&O, Currency & Commodity