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(Precious) Words of Wisdom : "If stock market experts were so expert, they would be buying stock, not selling advice." ~ Norman Ralph Augustine

Prediction is Impossible. Here's The Best Way To Invest In Equity.

Last week I got a shock when I bumped into an old colleague after almost a year.

With no job, no car, no house, no savings and a big debt, he naturally looked miserable. Shocking because till recently he had a great job, a palatial house, two big cars and an enviable bank balance!

Why did he end up like this?

Reason: Not following the three golden rules when investing in the equity market (either directly or through mutual funds).

Golden Rule No. 1: Never borrow to invest in equity
Who isn't tempted by the booming stocks markets? And on top of that availability of easy & cheap finance!

My colleague too fell for what appeared to be a golden opportunity... to quickly becoming a multi-millionaire.

So armed with his bank balance and taking a big loan against his house, he plunged into the stock markets with a gusto. But soon thereafter the markets fell precipitously. Not only did he lose money, but also his house & car as he had to pay-off the loan. Having gone into depression, he lost his job too.

If only he had not borrowed money to put into stocks!!

He could then possibly have avoided distress selling. However, as he couldn't service the loan, he had to perforce sell his stocks at a huge loss.

equity-investing-rules

Golden Rule No. 2: Don't bank on just a few stocks
Further, the entire money was invested in 2-3 market-fancy stocks; rather than in 10 to 15 solid businesses.

We all are aware of what market fancy does to the stocks. It quickly takes them to stratospheric heights and then dumps them equally fast as pariahs never to recover. For example the tech, the pharma or the infrastructure booms and busts, among many others!

'Don't put all your eggs in one basket'. This may be an oft-repeated cliche, but no one can deny its' efficacy.

In fact, that's why investing in mutual funds make more sense. Because, even with a limited amount of money, you can own a well-diversified portfolio of stocks. 

Golden Rule No. 3: Avoid lump-sum investment in equity
Besides, he made lump-sum investment.

Given that the equity markets are highly volatile, it is never prudent to commit your entire money in one shot. Another oft repeated cliche – slow and steady wins the race – is again equally applicable here. However, in his anxiety to make fast money, my colleague had to pay a very heavy price.

That's why SIP or Systematic Investment Planning is often recommended by most financial experts.

And, since you don't need large sums to invest, your monthly savings is sufficient. You don't need to resort to borrowing money.

Concluding, as Benjamin Graham aptly states in his book The Intelligent Investor "Investing is about making money in the future. And there are two ways to look into the future – Prediction and Protection. Prediction is Impossible. Therefore, the best way to make money in the future is Protection".

The morals in the above story do precisely that — they protect our investments and thereby increase the chances of making money from equity markets.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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