Six Investing Mistakes to Avoid Now

Watching the swings of the stock market lately has been an exercise in anxiety management.

Just when we thought that global stocks were stabilizing, there was a fresh downturn. In recent weeks, India's stock market has been rocky because of fears that the U.S. and European economies are in bad shape and that, in turn, would hurt stocks.

This week opened with the Bombay Stock Exchange's Sensex down 340 points in one day, followed by another 164-point decline the next day. Luckily, the rest of the week has been positive so far.

This sharp volatility is enough to make investors nervous about what's next. It's also a ripe time to make investing mistakes. Beware; they could hurt you in the long run.

Here are six common investing mistakes individuals tend to make in volatile markets, and 

how to avoid them:

Getting emotional: It is natural to be concerned when the value of your savings fluctuates wildly. But financial advisers assert that individuals are best off ignoring day-to-day stock price movements because they simply make you nervous and can get in the way of your long-term investing goals. "It's always good to be balanced in your approach, rather than getting emotional in your investments," says Arti Sahgal, senior manager of financial planning and investment advisory at Bajaj Capital Ltd. in New Delhi. "When you take a call, go steady with it."

Pulling out of stocks: This may seem like the easiest thing to do to reduce your anxiety but it's easily the worst mistake you can make. Once you sell your stocks or stock mutual funds, you've locked in your losses. Also, where would you put that money? It's tempting to think that you will reinvest in stocks when the market stabilizes or hits bottom but are you certain you will know when the bottom has come? Most people don't.

"Your investment should be goal-oriented," says Jai Adiani, an adviser at Mumbai financial services firm Sykes and Ray Equities. If there's a specific goal with which you have invested in stocks – say, saving for your child's college education 10 years from now -- you know that you don't need the money right away. Continue to let it ride the stock market volatility for the period of your goal because stocks give their best performance over the long term.

Stopping your systematic investment plan: If you have been wise enough to invest in the stock market through a systematic investment plan, don't be foolish enough to stop that now. A systematic investment plan basically gets you to put money either into individual stocks or stock mutual funds through a periodic investment, say every month. By buying stocks over a period of time, you capture the ups and downs of the market, and thus hopefully lower the average purchasing price of your stock or mutual fund. If anything, volatile markets are the ideal time to benefit from a systematic investment plan, says Ms. Sahgal, because when a mutual fund's net asset value is down, the investor will be allotted more units of the fund for the same amount of investment.

Buying more "safe" investments: OK, so you're brave enough not to pull out of stocks. But now do you want to put your additional money into a relatively safe fixed deposit? That might not be ideal. If you put too much into this, your portfolio could become too debt-heavy, which in the long term could lower your returns.

A one- to three-year fixed deposit in a bank is paying anywhere from 6.5% to 7.5% interest rate, which is short of the inflation rate. Market experts expect interest rates to go up in the next few months, as the Reserve Bank of India tries to curb inflation. So, if you do plan to invest in fixed deposits, you might be better off waiting for a few months.

Loading up on gold: Given the sharp increase in the gold price over the last six months, investors have been very eager to buy gold as an investment, say financial advisors. The gold price recently hit an all-time high of 19,220 rupees ($430), and its natural to assume that it will keep going up further.

While that is possible, remember that the price can reverse also. In fact, history shows that over the last 20 years, gold has earned only 6% per year compared with an average gain of more than 15% for the Sensex. So, restrict your investments in gold to a small part of your portfolio, 5% or so.

Trading on margins: "In volatile markets, the biggest risk you can take is playing on margins," says Mr. Adiani. "Margin trading" basically involves buying stocks on borrowed money. You can buy a 50-rupee stock by paying just 25 rupees from your pocket and borrowing the remaining 25 rupees from your broker for some interest. If the stock goes up to 75 rupees, you'll have technically made a 100% gain, because you had only put up 25 rupees.

But if the stock price fell to 25 rupees, your loss too would be 100%. In addition, you'll have to pay the broker some interest for the borrowed money. So, in down markets, losses can add up very quickly.

Individuals are best off steering clear of margin trading, say financial advisers. 

Ref: http://online.wsj.com/article/SB127624116529704281.html?mod=wsj_india_main