The Most Authentic Guide on Personal Finance and Investments

Words of Wisdom : "The best way to teach your kids about taxes is by eating 30% of their ice cream." ~ Bill Murray

Who’s getting rich – you or your broker/advisor?

Frequent buying and selling of stocks is very common. Among the many myths prevalent, one is that you should be an active trader. Nothing could be far from truth.

‘Active’ does not mean actively buying and selling — but active in being knowledgeable about the economy/markets; active in researching stocks; active in tracking markets and active about global influences. 

So why do people actively churn their portfolio?

Lack of discipline
The stock markets are generally looked upon as a get-rich-quick machine. Therefore, most investors do not exhibit either the discipline or long-term strategy in their investment decisions. They are chasing quick returns. Consequently, they buy/sell so often that they churn their portfolio many times over. Needless to mention that this short-term focus is extremely risky!

Another common manifestation of lack of discipline is timing the markets. Despite being fully aware that predicting the markets is simply impossible, people do not hesitate in speculating about the market directions. And to top it all, they use all kinds of theories to rationalize their so-called predictions. If only life were so easy, we would all be Warren Buffetts.

Lack of patience
The moment we buy a stock, we expect it to double soon. We will call our broker 2-3 times a day or opt for SMS feeds. We will check the prices on the stock tickers being displayed by many TV channels 24-hrs a day.  If there are no significant gains happening in our stock, while some other stocks are moving, we get impatient and switch out to other stocks. And this story repeats itself every day; day after day. 

Fortunes of businesses do not usually change overnight. They are not as volatile as the stock markets and they take time to grow. So it is quite unreasonable to expect your investment to double in quick time, that too just after 'you' bought it.

Lack of right advice
Sure, a part of the blame, for an investor frequently churning his portfolio, does fall on his broker/advisor too. We have seen many brokers and PMS companies who advice their clients to move in and out of stocks on a regular basis. The primary motivation is their brokerage income and not the client’s interests. 

Remember, you may or may not make more money by churning your portfolio; but your broker/advisor will always make money.

Of course, not churning your portfolio at all is also bad, as you need to regularly exit the under-performing/overvalued investments. You need to book profits and cut losses at appropriate times.

Therefore, it is important to strike the right balance. Thorough research, keeping a watchful eye on the markets, setting-up proper stop-loss and profit targets, etc. will help you to arrive at correct buy/sell decisions and make your churning a profitable exercise — for you too. 

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Ignorance is like a SIGNED BLANK CHEQUE... anyone can MISUSE it.

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