Remember the lessons learnt from the gloom

The much-awaited good news from the US has finally begun to trickle down. The world's biggest economy, which brought the downfall for the global economies with its financial crisis, is beginning to steady.

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Though many Asian markets have already been on a roll with their domestic comforting trends, the revival or the stoppage of deterioration in the US economy is bound to keep the momentum going for markets across the globe. Expectedly, the advertisements from broking houses have gone up and we are back to the days of investors wondering whether they should have a go at the stock market. Not surprising considering that indices are back to the habit of galloping in trading sessions.

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While the broader market looks comforting for medium term (say 3-5 years), there are some uncomfortable signals with respect to certain stocks. You have stocks whose PEs is once again sky rocketing beyond 30 range and momentum is the word used often on Dalal Street.

While it is always tempting to pick stocks, which are momentum driven for short-term gains, don't forget that they can also make you lose heavily in the absence of fundamental story. In fact, for your trading strategy, just put yourself in market 2008 and chances are that you will turn cautious overnight! Since market meltdown of 2008 is still fresh, it is worth implementing some strategies from the lessons of past.

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Segregate short-term from long-term:

If you are a habitual stock market trader, segregate your portfolio into short-term and long-term. Use your short-term portfolio for active trading and long-term for stock portfolio for building stocks, which have the ability to survive long haul. In terms of corpus, your short-term and long-term portfolio can be in the ratio of 40:60 if the amount is less and can go down to 25:75 when the corpus is over a million.

Stick to the allocation without compromise as no amount is enough for trading. For your short-term portfolio have the discipline of booking profits at regular intervals. Not a bad idea to fix the cap at 5% as a monthly profit of 5% translates into annualised pre-tax profit of 60%!

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Avoid junk stocks:

There is a mis-conception among traders that active investing revolves around non-fundamental stories. As a consumer, if you have the habit of going for quality, why should you change your strategy with respect to money? Your earnings too should chase quality and stick to stocks that have the ability to perform and be around for a few years. Even if they fail to give the desired results in short-term, they carry the potential to deliver over a period of time.

Cash profits are better than book profits:

Ask any equity investor and chances are that he will have a few stories of his opportunity of profit booking during the boom days. Let your decision to book profits be based on your return expectations and your liquidity needs. Make it a point to realise the profits you make from trading on a regular basis and, if comfortable, shift them into a capital-protected product. Use the money at regular intervals to pick your long-term portfolio.

Make tax planning a family affair

And finally, make it a habit to keep a tab on your portfolio and markets as complete dependence on your trader can land you in trouble over a period of time. Use your stockbroker as a search engine but you take the final call.

Lessons from the past:

Don't get greedy with your return expectation

Profit on hand is better than paper money

Distinguish between short-term and long-term portfolio

Use trading profits to build long-term portfolio

Srikala Bhashyam is the Managing Partner of RS Consultants. She runs an investment-consulting firm in Bangalore to provide consultancy in the areas of financial planning and media. In the last 15 years, she has worked with top publications in different locations. The primary focus of all her columns is to simplify the nuisances of Finance, which has attained a new look over the years. Besides being a columnist, Srikala has also been closely associated with some of the prestigious book projects.

The author can be reached at srikala.bhashyam@gmail.com

The views expressed in the article are the author's and not of Sify.com.

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