Synopsis: If you’re someone who has invested with little knowledge of stock markets, or through tips and recommendations, then you must first find out if the investments you’ve made are fundamentally sound. Bad ones are to be eliminated from the investment portfolio asap. The next step is to identify how long you are willing to remain invested or investment horizon in those fundamentally sound investments. After identification of the investment horizon, focus must be laid on the buying price, as it should align with the investment horizon. If it aligns, then it is best to stick to your investment strategy otherwise it would be more reasonable think how to change your investment strategy after exiting the current position with as much profit as possible.
With increasing financial awareness, retail participation has increased a lot in the markets recently. Unfortunately, most of this participation via investment is done with little to no knowledge of stock markets, which will lead to blood bath in markets, when it would correct in future. The primary reason for majority of these investments being bad is lack of a proper investment strategy. So, in this blog, we would cover how you must pick your own investment strategy and how to change your investment strategy.
Why must you choose an investment strategy?
While majority stock market free webinar would argue that you must invest in fundamentally sound stocks, very few tell that you have use a right investment strategy for them. If you’re investing in a very good stock, but at a extremely high price, you could still face huge loss, if a correction takes place.
A widely popular case study of this scenario was for people who invested in Tata Elxsi stock when it was at Rs 8000 level, thinking that it would go to Rs 10000. It did surely go up to that price. People in excitement bought more of it and it corrected after that causing blood bath. See this chart: https://www.tradingview.com/x/rYk0eB5T/
For those who were investing in the stock for more than 10 years, it won’t matter much, but for those who were looking to invest in the stock for 1-3 years would be devastated by this.
So, to sum it up into words, it is extremely important to buy the right stock at a right price. To buy the right stock at the right price you need to have an investment strategy.
How should you choose your investment strategy?
Before we discuss how to choose your investment strategy it is crucial to understand the difference between trades and investment. Most beginners and even those who have been in market for a couple of years misunderstand it. A trade is done for a short-term gain while an investment is for long term wealth creation. An investment isn’t made for anything less than a year. If you’re thinking to put your money into something and thinking to withdraw it in less than a year, then it is a trade and not an investment.
Also, you can’t just convert a trade into an investment overnight, due to any factor – i.e. loss, strengthening fundamental or news. The reason for this being forbidden is very simple. Since you haven’t analysed the stock and bought it at a price as per an investment strategy, you can’t just magically transform it into an investment. This is a major reason for people making losses in the market, as they become long-term investors into stocks, they are facing losses. The same applies to the scenarios where you had made a 20-30% profit and now you want to invest into them. It is crucial to sell as per the strategy as per you’ve bought.
So, what investment strategy should I chose?
Firstly, you should categorise your stocks as per the following categories:
- Less than 3 years: These are called short term investments. You would hold stocks of this category for a period of anywhere between 1-3 years.
- 3-5 years: These are often called as medium-term investments.
- 5-10 years or more: These are called as long-term investments.
Now, you could you the following any of the investment strategy for making those investments.
For less than 3 years, you could use an investment strategy called Golden and Death cross. In this investment strategy, you could buy when the 50 Moving Average intersects the 200 Moving Average from bottom and sell when 50 Moving Average intersects the 200 Moving Average from above. The timeframe of the chart is to be kept Daily.
For 3-5 years, you could use an investment strategy called 200 Moving Average Cross. In this investment strategy, you could buy when the price intersects the 200 Moving Average from bottom and sell when price intersects the 200 Moving Average from above. The timeframe of the chart is to be kept Daily.
For 5-10 years, there are several strategies you could deploy. You could buy after comparing the stock PE with its sector PE to determine if its undervalued. You could also buy stocks when Nifty50 PE is undervalued (which falls under the assumption that if Index is undervalued, stocks would be too). If you are investing for 10 years or more, you can also do a monthly sip for the duration, if the fundamentals of the stock are good enough and remain to be the same or better.
Question comes, now how to change your investment strategy if you have done a mistake?
To change your investment strategy,firstlyyou must identify your buying price and compare it to the buying price as per the strategy you’re willing to use. If your buying price is higher than your strategy buying price, then it is best to exit the current position with maximum profits in short-term using any technical strategy such as trend analysis. If you don’t know how to do trend analysis, refer here. Then you must re-invest using your chosen investment strategy.
If your buying price is same or lesser than your strategy buying price, then you can adhere to the strategy without making any changes. With this implementation, you could multiply your capital using the power of compounding in your investment portfolio.
These concepts are widely discussed in Top 5 Online Stock Market Courses in India, so don’t shy away in learning more about stock markets.