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Eight must dos for stock investors

Stock investing doesn't mean having just ten shares of one company and twenty in another. Invest regularly to create wealth.

June 19, 2015 2:04 IST | India Infoline News Service
Retails investors trading in stocks should stick to some basic norms as they go about building a stock portfolio.
 
First and foremost, be a regular investor. Stock investing doesn't mean having just ten shares of one company and twenty in another. Invest regularly to create wealth. Good stock picking is all about knowing how to allocate your capital efficiently across the best ideas in a diverse portfolio.
 
Secondly, diversify across businesses. Buying stocks in only one or two companies can be a very risky bet. A concentrated portfolio is like putting all your eggs in one basket. Similarly, too many stocks in a portfolio may become unmanagable. An ideal stock portfolio should have not more than 20-25 names across different businesses for diversification.
 
Third, review your portfolio frequently. While one investment strategy is to buy and hold, that does not imply that you put in your money and sleep over it. Market prices move, sometimes dramatically and you may end up having too much or too little exposure to a sector or stock. Review your exposure regularly.
 
Fourth create your own rules. Formulate your own rules on when to buy or sell a stock based on an investment philosophy. Don't just follow the herd or come under peer pressure. What is good for others may not be suitable for you or your portfolio because your risk, investment criteria and entry price may be different.
 
Firfth, don't time the market. It's a very bad idea to wait for a stock or the market to reach a particular level to buy. Do set a price target for your preferred stock and let your own investment philosophy guide you whether you will buy a stock, take the money off the table or stay invested.
 
Sixth, sell at the right time. Stock investment is not about knee-jerk response to a market trigger. Do respond to triggers, but after you are convinced about their implications. Also, if a stock is a constant underperformer, and if you realise you made a poor decision, sell it. Don't wait for it to go up
 
Seventh, always keep some cash in hand. Professional investors recognise that good investment opportunities come unannounced. Make sure you keep some cash available in your portfolio to pounce on these ideas. If you are fully invested, you might miss good opportunities due to lack of liquidity.

Eighth, be in a stock for the long haul. If a stock you own suffers a loss in any year it does not mean the company is doomed forever. If you believe in the core story of that company, you should stick it out for at least 10 years, if not 20 years.

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