Enthusiasm is easy at market highs, and fear is natural at lows, which is why so many investors buy at the wrong moments. A written plan removes emotion from the equation and replaces it with rules you can follow when conditions get stressful. Whether you are interested in the HDFC Bank Share Price because of its reputation for consistency, or you follow the SBI Share Price for its recovery potential and wide reach, a structured approach improves your odds of success. This article outlines practical steps for building such a plan around financial sector holdings.
Start With Your Objectives
Start by answering why you are going to invest. If you aim to send your child to college after twelve years, you can’t afford to act like you want to retire in three decades. Estimate the amount you need, the time you have and how much you can put in every month.
Next, you need to understand your risk appetite. If you know you would commit hari-suicide if your shares drop thirty per cent in a year, cut down on equity or spread yourself thinly. Your investment plan should be something you would follow even when things go wrong.
Decide How Much to Allocate
Most diversified mutual funds and index funds in India already contain a decent amount of financial companies. If you have such mutual funds, you can’t go and directly buy more bank shares, thinking that you have exposure to the banking sector, while, in reality, you might have already crossed the recommended limit.
A good rule of thumb would be to not keep more than a certain percentage (as per your risk appetite) in any one sector. Diversify within sectors like technology, consumer durables, healthcare or capital goods so that the problems in any one industry do not outweigh the gains in others.
Use Staggered Entry
Instead of putting in a large chunk of money at one go, split your entry into installments. It will help you avoid the risk of getting caught in a falling market. A good way to do this is to decide on a fixed date every month to buy a fixed rupee amount of shares. You will end up buying more shares when the market is down.
If you get wind of a large amount of money coming your way, say a bonus, park it in a safe short-term instrument and use it to buy shares of the company in instalments as discussed above. Always remember: regularity trumps timing.
Set Entry Criteria Based on Fundamentals
Before you buy, decide on what kind of company you are looking at. Some pointers are:
- Improvement in asset quality
- High capital adequacy ratio
- Better return on equity
- Rise in deposits
- Reasonable valuations compared to past performance
It is a good idea to write down a list of what you are looking for so that you do not get tempted to buy a stock on some hot news item flashing on television or some chat-room message.
While doing so, keep in mind that the most important valuation metric for financial companies is the book value. Compare this to where the stock has been trading on average and to its peers. Remember that good companies usually fetch a premium price.
Plan Your Exit Rules
Decide before-hand when you will sell. Good reasons to sell are:
- Deterioration in asset quality
- Governance issues
- Fundamental change in business strategy
- Reaching the target allocation
Bad reasons to sell are because the stock has gone down in value or because you think it will go further down. Sell when there has been a change in perception about the company.
If your financial stocks have outperformed the market and have crossed the stipulated percentage, it is a good time to rebalance. Cut your positions in financials and use that money to buy more of whatever you think has been underbought. In this way, you can always take profits smartly and keep risks low.
Monitor Without Obsessing
Read about every company’s quarterly results, listen to what the CEO has to say and keep an eye on government notifications. But do not watch every day what your stock is doing. It will only make you fickle-minded. Keep a personal log of why you have bought that stock and update it every quarter. Refer to it to determine if you still stick to your original decision.
Protect the Foundation
Before you start investing in any financial asset make sure you have adequate insurance, a good medical policy and have an emergency corpus. Do not get tempted to take a loan to invest. All of this will help you to not sell your stock at a low price because you need the money to survive.
The Value of Patience
A well-thought-out plan will ensure that you don’t lose sleep over your investments. It will keep you from making rash decisions when markets go down and help you learn to compound your earnings.
By setting an objective for your investment, not overconcentrating on any one sector, using a staggered entry so that you do not run into the risk of getting caught in a falling market, keeping a watch on fundamentals and rebalancing your portfolio every year, you will develop traits that will get you through any kind of market condition. And over the long term, patience and temperament will take you much farther than any crystal ball-gazing would.
