The year 2008 has been unkind to investors so far. Many have suffered huge losses. Who knows, there could be more pain ahead. It’s worth reminding ourselves of basic lessons that every retail investor ought to keep in mind to avoid, or at least minimize, losses in one’s portfolio.
1. High rewards don’t come without taking high risk.
Remember, if you chase high returns, high risk will follow you.
2. Understand what you own — don’t always rely on the latest tip or prediction.
In today’s wired world, it is possible even for retail investors to understand, even if in basic ways, what is it that you are about to invest in — what does the company do, who its customers are, is the company profitable and so on.
3. Leverage is a double-edged sword that can destroy you in falling markets.
The recent collapse of various hedge funds and banks has shown that living on borrowed money can be dangerous.
4. Keep some of your powder dry — you don’t always need to be fully invested.
Keep some cash available to take advantage of falling prices. Professionals think of a correction in stock prices as a sale in stocks.
5. Build portfolio on a strong foundation.
Your stock portfolio also needs to be built on the back of strong companies and predictable stability. The more junk you have and poor quality stocks you own, the quicker your portfolio will also collapse during a correction.
6. Keep a wishlist of companies.
Smart investors keep a wishlist of companies whose shares they want to buy when the opportunity and price are right.
7. Invest for the long-term.
Serious investors put money to work for the long-term.You will also avoid the tax liability associated with short-term trading that can add more complexity to your finances.
Click here to read the entire article in Economic Times.