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Don't panic, it could be your best time at the markets
Published on Mon, Oct 06, 2008 at 16:34, Updated on Mon, Oct 06, 2008 at 18:47 in Business section
Tags: Stock Markets, Sensex
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I confess. I flirted with the idea of using the stock market to finance the beach holiday I desperately need but could not afford.
The party that the index kicked off had tempted many like me to ride the wave with a few 'stock tips' that were doing the rounds. Common sense prevailed. I refrained.
If it was that easy to make money, wouldn't we all be sunning ourselves 365 days a year?
My friend Ratan was made of less stern stuff. Swayed by the rising index, he invested Rs 20,000 in a few shares his friend recommended. He waited for his money to double before pulling out.
Sadly, the next day, the market crashed 500 points. He panicked about a further fall and sold low, which not only took away his dream vacation, but a bit of his savings, too!
Where did the poor chap go wrong? Well, in every way.
Unfortunately, he became a poster boy for what NOT to do while investing in the stock market. Let us count the ways.
Rush
Fast is never a good idea and certainly not in equity. Short term goals cannot be met through stock markets. The fundamental rule is, you stay invested no matter what.
Certified Financial Planner Gaurav Mashruwala says, "For financial goals less than two or three years away, choose debt products. You will lose to inflation but the impact will be negligible. For distant goals, choose equity."
Bear with me as I go number crunching.
The table below shows the relationship between the period of investment and the chances of loss. It proves that the longer you stay invested, the probability that you will lose money decreases with every passing year, reaching almost zero at 10 years.
| 1 year | 3 years | 5 years | 7 years | 10 years | 15 years | 20 years | |
| Probability of loss | 10/26 | 5/24 | 3/22 | 3/20 | 1/17 | 0/12 | 0/7 |
| Average Return | 27% | 18% | 17% | 17% | 18% | 19% | 17% |
(Calculations based on BSE sensex values from 1979 till 2006)
Panic
It is easy to say don't panic. But let me ask you this: what did you do the last time you saw your money evaporate before your eyes?
Like Ratan, everyone clambers into the market when it is rising.
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