Frequent buying and selling of stocks is quite common. In fact, among the many stock market myths prevalent, one is that you should be an active trader. Nothing could be far from truth.
'Active' does not mean buying and selling frequently. No, definitely not!
Instead, it means being active in acquiring knowledge about the economy / markets; active in researching the stocks; active in tracking the markets; and active about the influence of global events.
So why do people actively churn their portfolio?
Here are three obvious reasons:
A. 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 the 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.
B. Lack of Patience
The moment we buy a stock, we expect it to double in quick time. We will call our broker 2-3 times a day or opt for SMS alerts. 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 fast, and that too just after 'you' bought it. As if the world was waiting for you to buy and then the stock started moving up. Isn't it ridiculous?
C. Lack of Right Advice
Sure, a part of the blame, for an investor frequently churning his portfolio, does fall on his broker 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 clients' interests.
Remember, you may or may not make more money by churning your portfolio; but your broker will definitely make money... with each and every trade. More importantly, you cannot expect to have multi-baggers in your portfolio, if you are not invested for years.
Of course, not churning your portfolio at all is also bad. You have to regularly exit the under-performing / overvalued investments. You need to 'book profits' and 'cut losses' at appropriate times. Any delay and you could end up 'losing the gains' or 'gaining the losses'.
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 the portfolio churning a profitable exercise — for you too.
'Active' does not mean buying and selling frequently. No, definitely not!
Instead, it means being active in acquiring knowledge about the economy / markets; active in researching the stocks; active in tracking the markets; and active about the influence of global events.
So why do people actively churn their portfolio?
Here are three obvious reasons:
A. 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 the 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.
 |
| Strike the right balance between churning and staying invested. |
B. Lack of Patience
The moment we buy a stock, we expect it to double in quick time. We will call our broker 2-3 times a day or opt for SMS alerts. 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 fast, and that too just after 'you' bought it. As if the world was waiting for you to buy and then the stock started moving up. Isn't it ridiculous?
C. Lack of Right Advice
Sure, a part of the blame, for an investor frequently churning his portfolio, does fall on his broker 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 clients' interests.
Remember, you may or may not make more money by churning your portfolio; but your broker will definitely make money... with each and every trade. More importantly, you cannot expect to have multi-baggers in your portfolio, if you are not invested for years.
Of course, not churning your portfolio at all is also bad. You have to regularly exit the under-performing / overvalued investments. You need to 'book profits' and 'cut losses' at appropriate times. Any delay and you could end up 'losing the gains' or 'gaining the losses'.
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 the portfolio churning a profitable exercise — for you too.
