Don’t time the market

It is more important to spend time in there

The law of demand tells us that higher prices bring down demand and vice versa. But, there are exceptions to this rule, the biggest being the stock market — as prices go up, more investors flock to the stock market, and when the markets fall and stocks become cheap, more investors want to leave the stock market.

Counterproductive as it is, most investors thus end up buying when prices are high and selling when prices are low.

Do not follow the herd
Investors typically follow what everybody around them happens to be doing - buy if everyone is buying, sell if they are selling. But, this does not help because investors are essentially trying to enter or leave the stock market based on their perception of where it is headed. In short, they are trying to time the market, something even professional investors would agree is very difficult.

Invest regularly
A number of experts have been shouting from the rooftops since the Sensex touched 6,000 that the market is overvalued. But, that didn’t stop the index from rising 250% to cross the 21,000 level or falling by around 30% from that level. And now, when the markets are around 16,000, the experts seem to be suggesting that it’s the right time to buy, as stocks are available at lesser prices.

How does an individual protect his or her investments from volatility in the stock market? The answer lies in the age-old adage, “invest regularly.” How does regular investing help? The simplest answer seems to be that an investor can keep investing even if he does not have a large amount of money to invest. Also, with regular investment, money earmarked for investment does not go towards spending.

Regular investing also brings “cost averaging” into play. Say an individual invests Rs5,000 to buy 100 shares of A Ltd at the rate of Rs50 per share. Some time later, say the price drops to Rs25. Now if he decides to invest Rs5,000 again in A Ltd, he ends up buying 200 more shares. Now he has 300 shares of A Ltd. Thus, his average price per share now is Rs33.33. Hence, he can make a profit once the share price goes beyond Rs33.33 and doesn’t have to wait till it reaches Rs50 again.