Systematic investing has changed how ordinary Indians participate in the market. While most people associate it with mutual funds, the same idea can be applied to individual stocks. An investor who gradually accumulates the Reliance Share Price over many months, rather than in one lump sum, reduces the risk of poor timing. The same method can be applied to cyclical names such as the Tata Steel Share Price, where volatility makes staggered buying especially sensible. Here is how to plan such an approach thoughtfully.
Why Staggered Investing Works
Markets are unforgiving in the short term. A large investment made at the peak can lead to crippling paper losses. Buying in instalments helps one average out the cost of purchase and buy more shares at lower prices and fewer at higher prices.
This approach, called rupee cost averaging, will not help one profit from falling markets but it will impose behavioural discipline as once the schedule is decided, the temptation to time the market (which always ends up disappointingly) is reduced.
Choosing the Right Stocks
Staggered buying makes sense only with fundamentally strong stocks. They should be companies with sustainable competitive advantage, good market position, prudent leverage and a track record of honest and transparent management.
Avoid the temptation to stagger purchases of weak stocks. After all, buying more of a sinking ship is not a wise decision. Review the list of stocks at least once a year to ensure that their fundamentals continue to remain intact.
Setting the Amount and Frequency
Decide upon an amount that you can spare without affecting your core expenditures. A fixed-income allocation (say 10-20 per cent) to long-term savings and investing goals works great. Decide upon a frequency as well. While monthly instalments make sense for people with monthly salaries, some may prefer fortnightly or quarterly.
Automate the process as much as possible. Most brokers today allow for automatic purchase of stocks, and mutual fund houses allow direct debits from one’s account to the fund of one’s choice. This helps overcome the mental block one faces when markets take a nosedive and prevents one from selling at the wrong time.
Increase Contributions Over Time
With an increase in income, increase the amount being invested as well. A simple way is to increase it by 10 per cent every financial year. The compounding effect of additional contributions made at regular intervals will enhance the corpus at a spectacular rate. Link the increase to bonus or salary increments received so that it becomes a natural progression in one’s financial planning. With a fall in markets, evaluate if you can increase the amount being invested to buy more shares of fundamentally strong stocks. Remember, a correction is one of the best times to accumulate good stocks provided one has sufficient emergency savings to fall back upon.
Track Progress Without Obsessing
While it is good to track progress, obsessing over day-to-day fluctuations can work one’s nerves. Quarterly and half-yearly reviews make better sense. Compare performance to a benchmark (such as a stock market index fund) to judge if the portfolio is tracking well. Recheck the sectoral allocation and if some stocks have acquired too big a weightage (in case of default or steep fall in value), rebalancing may be necessary. Maintaining a purchase book (with dates) will help track the gains and losses and tax liabilities. Remember, long-term capital gains (on stocks held for over twelve months) are taxed at more favourable rates.
Pairing Stocks With Other Assets
While stocks are integral to one’s financial planning, they must be balanced with debt instruments (such as Public Provident Fund, fixed deposits and bonds) for stability and gold as a hedge. The allocation must be determined by one’s age, risk profile and ability to withstand volatility.
Following a systematic approach towards stock purchase can transform a volatile and anxiety-inducing proposition into predictable and measured steps. The right mix (based on age and risk appetite) of fundamentally strong stocks bought in regular instalments with regular increases in the contribution amount and a periodic review will help channelise the power of compounding. It must be borne in mind that it is not the genius of the stock picker but the constancy of the approach that will yield the best results. This information is indicative only and should not be used as a recommendation to buy or sell any security.