A falling market tempts investors to invest more in the stocks they are holding. Everyone around you tells you to invest more in a falling market to average out the buying price.
It makes perfect sense to add more stocks when the prices are cheaper but averaging out is an art and needs to be done strategically, else you end up holding losers that will form a significant part of your portfolio and would never go up again. Recent examples are Yes Bank and DHFL.
Here are a few important tips to keep in mind when you are averaging out your buying price:
– Markets have a history of declines of 50-60% from peak every decade. Therefore, you must plan to average out keeping the worst-case scenario in mind.
– Minor 3-5% corrections are not good enough to start averaging out. Tranches of averaging out should begin with at least every 10% correction.
– Do not go overboard in one/few stocks or mutual fund schemes while averaging out. You must decide well in advance that any particular stock exposure should not go above 10/20% of your portfolio irrespective of how strongly you feel about the company/fund. Once that limit reaches, stop investing more in that particular fund/stock.
– At least 50% of your initial investment amount should be added more when you are averaging out to have a meaningful reduction in the average buying price. Therefore, you must maintain a decent size of “market opportunity fund” in safer assets like ultra-short-term debt mutual funds to be able to take advantage of market declines.
– Do not sell your winners to invest in losers. This means do not assume a stock which has fallen more will generate better future returns than the stock which has fallen less. Maybe there is a strong reason behind a bigger/smaller fall in value that other market participants are aware of.
If you execute the averaging out methodology in a disciplined manner as stated above, it will do wonders for you when the market will regain the uptrend. On the contrary, if the execution is poor, you will regret it big time. There is no success in investment without discipline.
Always remember, that the pain of losing is psychologically twice as powerful as the pleasure of gaining.
Originally posted on LinkedIn: www.linkedin.com/sumitduseja
Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.
