Golden Rules of Investing

Valuable lesson for Stock Market investor

• LESSON 1: There is no such thing as a good stock

There are only good companies. When someone tells you ‘this is a good stock’ you need to look beyond the stock chart. Why is the company a good company? How will it grow its business? If you can’t answer these questions, you don’t know what you own.

• LESSON 2: Have a premise

When you buy a stock you must have a premise. A premise is a reason why that particular stock will go up. For best results, the premise will be one that explains why the company’s line of business will increase, and why the marketplace will value that business at current or higher multiples. Without a premise, you don’t own an investment, you just own a stock.

• LESSON 3: Think trends. Buy stocks

If you really want to invest in big growth stocks, you need to invest in secular trends. Secular trends are events unrelated to either the economy or individual company events. The advent of the PC, the birth of the Internet, and the desire for wireless phones, are all secular trends. The biggest investment winners are those companies which are ideally placed to reap the benefits of large secular changes.

Microsoft and Intel rode the transition to PCs as computing power became cheaper and cheaper. Nokia, Motorola, Qualcomm, and Ericsson all found them-selves unable to keep up with demand in the mid 1990s, when wireless phones finally reached the critical price points. If you want really big winners, find the trend, then find the stocks.

• LESSON 4: Know your risk tolerance

The biggest mistake most investors make is to buy positions with more risk than they can really tolerate. This is where most people got hurt in the Internet bubble burst. They had no idea they owned risky stocks. If you can always tolerate, both financially and emotionally, the complete loss of your entire position, you obviously will be okay. But most people aren’t in that position. Figure out how much downside you can live with without having to sell. Figure this out before you buy the stock.

• LESSON 5: Don’t average down to feel better

‘Averaging down’ is often a way to lose more. If you believe in the company, and the price goes down, you may want to invest more. But if you, like many others, purchase more simply to lower your ‘break even’ stock price, you are making a mistake. If you find yourself calculating new ‘average price per share’ points, you might be averaging down for the wrong reason.

• LESSON 6: Don’t miss the train to shave a dime

If you are investing in a major trend through a stock, and have a multi-year investment horizon, what difference does a few cents per share make on your purchase? Many investors try to place buys with limit orders just below the ask, and wind up missing the purchase.

If you really want a stock, particularly a big position, place a limit order at the ask, or even slightly higher. You will at least get the order. This is especially important if you are trying to buy far more shares than the current ask size. If you are right about the trend, you will never miss the extra ten cents per share.

• LESSON 7: Don’t buy hot and watch cold

Many investors buy a ‘hot stock’ and immediately look for big gains. When they don’t happen, the stock falls away from the daily attention list. Pretty soon it starts to edge downward, and, emotionally, the investor stops watching it.

Pain avoidance is common to us all. But you can’t let pain avoidance prevent you from watching your stock. If you do, you often take a look two months later and find the stock is far from hot, and you are now presented with a really painful decision.

• LESSON 8: A hold is as good as a buy

There is no such thing as a ‘hold’ decision. If you wouldn’t buy the stock again today, assuming you had additional money, you should either sell, or admit that you are confused. Resolve the confusion. The hold condition often happens when you have owned a stock for years, are way ahead of your basis, and are basically happy.

But what is driving the stock today? What will make the price rise in the future? Why would you buy the stock today, assuming you didn’t own it? If you don’t know, you don’t have a premise for this stock.

• LESSON 9: Don’t be an inadvertent long-term holder

When your premise doesn’t work out, or you no longer believe in the stock, you must sell, even if it means a loss. Holding on just to ‘get my money back’ is the single biggest reason for losing more money. Who owned all those stocks that lost 98 per cent of their value in 2000? A good percentage was owned by people who turned into long-term holders inadvertently, when they made the decision to just stick it out.

• LESSON 10: You will lose money

You won’t be right every time. If you are going to be an investor, you need to become accustomed to losing money on some positions. This rule is the natural consequence of living up to rules 5, 7, and 9. Taking losses is often the only way you can save your capital from further losses.

An Anatomy of the Stock Market! - Bull And Bear Market Cycles

In financial markets, the "majority is always wrong." When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When the crowd is overly exuberant, this is the time to be selling stocks. The financial markets work in this ironic way because not everyone can win in the market.

• The Start of a Bull Market

The bottom of the market starts at a time when the stock market is weak and the general population is pessimistic. At this point most investors sell after having endured a long and torturous bear market. This extreme pessimism found at a bottom is always irrational and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the "smart money", buy bargain stocks knowing that they will be able to sell them higher in the near future. Smart money buying, called accumulation, causes stocks to rise.

The smart money often consists of operators, and corporate insiders (promoters of companies). These traders have access to information that the general public does not.

Rising stocks eventually gain the respect of institutional investors, as billions of dollars of capital is introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however. As bull market events unfold, retail investors begin to take interest in stocks. Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when

investor sentiment is most optimistic so as to gain the highest possible stock price. IPO's generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market.

At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors. The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as stock market scams and fraud.

These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous. To compound the problems, investors will now start to use margin, or leverage, to further accelerate gains. All caution is thrown to the wind as investors think "the old rules don't apply" .

• The Start of a Bear Market

After mutual funds and retail investors are fully invested, the market is overbought. This means that there is no more cash to fuel the rally. The market can only go in one direction: down. All it takes is just a hint of negative news and the market collapses under its own weight. Investors quickly realize the market is made of smoke and mirrors, as frauds or other scams come to light.

How does one know that the market is topping. Though I am no expert, these are my observations :-

* Monthly charts at all time high.

* Momentum indicators in weekly charts showing overbought levels or prices falling below 30 week average.

* Prices falling below the 200 day moving average or below the two-thirds fibonnacci retracement of the primary market trend.

When panic selling starts, a market will always fall quicker than it had risen. Oftentimes, as everyone heads for the exit at the same time, there isn't anyone willing to buy the stock.

This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors don't sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover. As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. This mass exodus is called capitulation.

Just keep in mind here that there is no such thing as a cheap share, only a historically cheap share relative to other companies. Recent history might say shares are cheap but compared to the 1980's shares are quite expensive [time of writing: August 2011]. Back then the average P/E ranged between 6-8. Now they are 14-16. What looks cheap can always get a lot cheaper and this is the nature of a secular bear market. Any novices would do well to google secular bear markets but essentially it's a period of many years (14-16) when share prices range sideways as we have been doing since 2000. The share prices still goes up and down but Price:Earnings ratio falls. It means historical Price/Earnings values are not a reliable measure of good value. The last secular bear market was 1970/80's. They offer poor long term buy and hold returns and are quite difficult to trade.

• The Cycle Starts Again

It is at this point that stocks are undervalued once again. The smart money is accumulating and stocks rise. The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the "dumb money". They are perpetually late into the game. This cycle continues over and over. Only the smart money actually "buys low and sells high". After trading in this manner, the dumb money will adhere to adages such as, "the stock market is risky". In reality, however, the stock market is only risky if you trade like the mindless majority!

Choose investment based on your goals

The year 2008 would perhaps qualify as one of the worst-performing years in the history of capital markets. While the Western markets collapsed as a result of their own follies, they also managed to pull down their Asian counterparts. Here, the collapse of equity markets, high inflation rate, high interest rates, and declining commodity prices left investors with no place to hide. There was a point in time where holding cash was the safest bet.

While the equity markets still remain tepid, things have begun to look up on the inflation and interest rate fronts. Fiscal packages and monetary policy measures were steps in the right direction. For most investors though, confidence in the equity markets is shaken and it would be a while before money starts flowing into this asset class. So, where does an average investor park that extra money lying in his savings account?

Before deciding on where the savings or extra liquidity should be parked, you need to keep in mind the rationale behind the investment. Does the money need to be allocated for a medium to long-term goal or is it required in the short term to meet a need. In line with this, the money can either be invested in equity, debt or gold, based on your risk appetite, asset allocation and returns expectation.

If you need to set aside funds for the short term, parking them in a fixed deposit would be safest. However, for someone who is willing to take a little more risk, income funds may be the best bet in the current scenario. With a lower interest rate regime in the offing, it is a good time to invest in medium to long-term debt securities. This can be done by investing in income funds or gilt funds of mutual funds. While income funds usually invest in medium to long-term government paper (gilt) and corporate debt securities, gilt funds invest in government paper only. The decline in interest rates makes the existing securities with higher interest rates lucrative, thereby increasing their prices. This is a good investment opportunity for a time frame of 6-12 months.

Interest rates have already come down quite a bit and since no one can predict whether they will soften further, income funds may be better off than gilt funds, given that they have the flexibility to switch between corporate bonds and gilts. For a shorter tenure, parking excess money in liquid funds is ideal since they provide liquidity and market interest rates.

For the medium to longterm goals, investing bit by bit through the systematic investment plan (SIP) route would be a good idea. SIP is nothing but a planned investment programme, which takes a small sum of money from you and invests it in a mutual fund at regular intervals. It eliminates the need to time the markets since you would continue to invest whether the market is high, low or doing nothing. Small sums of money invested over a period of time can add up to a significant amount, thanks to the power of compounding. SIPs are available across the spectrum of mutual funds and you can invest in a diversified equity, index, balanced or debt fund, depending on your risk profile. A part of the monthly savings can be invested via this route.

Depending on whether the need is to park the excess money to be suitably deployed in the short term or to invest it for the long term, and keeping in mind the need for liquidity, risk appetite and asset allocation, you should plan your investments.

In the world of finance, the difference between profit and loss, wealth and liabilities, affluence and poverty, is, to a large extent, attributable to knowing. Financial planning means knowing and acting on that knowledge.

The tough thing about financial planning is it needs to cover a lifetime. When things all around us are changing every day, every time, it's difficult to foresee such a distant future. The right thing to do is have a plan clearly specifying what we want to achieve in life and the road map to the goals could be reviewed and the value of the goals re-calibrated regularly.

When we talk about financial planning, you don't have to really be worried about a complex process. In its simplest form, it involves listing out all the good things you want to do in life, putting a money value to each of the goals and managing your savings to earn the money you need to do those good things in life. While you are doing so, you just need to be careful about the bad things in life, too, like ill health, loss of job, divorce, accidents, death, etc, and make sure you and your family have enough money if these events were to strike you unexpected.

The key to successful financial planning is managing the right amount of savings and putting them to the most productive use. To achieve this, you need to cut down all wasteful expenses, save as much when you can and invest them in a way that you reduce the downside of losses and increase the upside of earning better returns. You may note the emphasis here is on better returns, which is not the same as higher returns.

The quest for higher returns may involve higher risk, but better returns mean returns balanced with manageable risk appropriate to your financial position.

Is there a simple formula to ensure effective financial planning and safeguard your portfolio from 'accidents'?

Here is a checklist:

• Start early: This is the first rule. Financial planning does not help you if you want to earn money suddenly. There are no quick-fix solutions to managing your money other than starting early in your life. Smart people start when they get into their first job. If you've missed out, don't worry, but do now as it's never too late.
• Be reasonable: When you set up your goals, be specific and put a money value for each goal. It goes without saying that your goals should be reasonably attainable. There is no point in dreaming about being a billionaire when you have little income. But, you can dream about a decent lifestyle and work towards it.
• Think long term : Behavior patterns change gradually. Your savings habits or the returns you get on your savings should have a long-term orientation. Long term here means at least five years and above. When you think long term, you obviously are taking care of the short-term volatility your investments may get exposed to. Also, money grows steadily and significantly in the long term due to the power of compounding.
• Save regularly : No matter what amount you save, save you must month after month. It's the rhythm that gets you the desired money and not necessarily the rate of return.
• Protect the downside : There is always a downside to any investment. The best way to protect against downside is to spread your investments across different categories so that if one goes down the other goes up. Choose your investments that match your risk appetite. Whatever mix you choose, don't forget to regularly review, rebalance and recalibrate your portfolio to align it to the changing financial conditions.
• Understand the risk-return link: There is definite link between risk and return. The higher the return, the higher the risk. Also there is a good linkage between the term of investment and the return you get. Mostly, the longer the term the higher the return.
• Do things that are good for you: Do not follow your neighbour. His financial circumstances are different from yours. Do what you think is good for you and do not get swayed by what others have done with their money.
• Account for inflation: Whatever you save, wherever you invest, your net returns are impacted by inflation. Your expenses grow significantly over the years, even though your needs don't, because of inflation. So, be mindful of inflation and provide a good cushion for it.
• No 100% magic formula: Obviously, there is no magic formula to surely make money. There is only common sense. If you have common sense, perhaps you don't need any magic formula.

(P Nandagopal, MD & CEO, IndiaFirst Life Insurance)

How to pick a wining share

It took me a long time and a fair bit of money to realise that just because a price has fallen significantly that does not mean it cannot fall further or that it is cheap. If you were standing at a fairground and a man was hitting a stake into the ground and the stake was 500 cm long and he had already knocked in 372 cm would you want to bet a £1000 a cm that he could not knock it in any further? A lot of people who thought Marconi could not get any lower lost money.

The opposite is also true. Just because something has gone up does not mean it cannot go further. If the same man was flying a kite and had got it up to 50 m would you want to bet he could not get it any higher?

How do you choose a winning share? There are thouands of shares listed on the Stock Exchange. It's rather like studying the runners in a horse race but with a far larger field. First you must learn how to read the form.

Picking a winning share: Its not the money that keeps me in this business. Its the adventure This could mean knowing how to study a company's annual report and balance sheet and understanding the various indexes and ratios quoted in the newspapers and magazines. In other words you need to learn the fundamentals, just as you would any other trade. Skill and inspiration come later.

Many people find analysing a company's records a fascinating business. Computer enthusiasts can have great fun preparing pretty charts showing, for example, price movements and resistance levels, the levels at which prices are not expected to go above or below.

But all these facts and figures will not guarantee YOU a winner. If success on the stock exchange was simply a matter of research and analysis there would be a lot more rich investors around. Don't fall into the trap of putting all your faith in statistics. Statistics are the past, they are dead. It's what is going on now and in the future that really matters. The price of a share is based on supply and demand, not on statistics.

• Read all about it

Read the industrial as well as the financial news. But if you see that a company has gained an important contract don't rush in and buy its shares. Shares react to good or bad news before it appears in the newspapers. The initial reaction could be exaggerated, or even wrong.

Before you buy any share you could try and discover everything you can about the company - its management, competitors, profits and possibility for growth. A growth share is your main aim. But it's not only you who must think that the share is a winner - other investors must think so too, preferably after you have already bought it.

You may spot a promising growth situation as you go about your day-to-day affairs; a new drug, a fashion house, or a food chain. 'They must be making a bomb' you say to yourself. This may be true and there is no reason why you should not have your share of the profits (provided their shares are available in the market) but you must do your homework first.

• All is not what it seems

Many years ago I bought some shares in a company producing pots and pans at very reasonable prices. I liked the product - in fact I bought some myself. The factory was on my way home from work and I noticed that they were working far into the night. I even talked to one of the employees who told me that their order book was full and they were taking on more staff.

I lost more money than I could afford at the time on those shares. The trouble was that they were selling their products too cheaply. A proper study of their annual figures could have given me a warning. I had not done my homework. There are lots of web sites which now publish comparative information on shares - some of it for free and some paid.

Stockbrokers' web sites also have information and list the recommendations of City analysts which you may want to follow or ignore. You need to have the courage of your own convictions.

In addition to the study of a particular company's affairs you must also consider outside influences. To give a simple example, if car workers are threatening to strike don't buy a share in any company connected with that industry. On the other hand, if a tourist boom is forecast it might persuade you to hang on to your shares in a hotel chain.

Shares move in accordance with supply and demand, but in the final analysis the value of a share is determined by its return to the investor. This depends on its profitability and on the value of its assets. Therefore, if you look for undervalued assets you must be on the right track -provided the assets are what people want.

If general conditions are improving ask yourself whether that particular company is having a fair share of the general improvement. Is its value rising? If so, determine whether the price of its shares is low or high with reference to its value. If the price is low buy the shares. Keep it until the price appears to be up to the value and then take your profit.

Some investors study only one or two shares, usually blue chips. They get to know their intrinsic value and deal mainly in their stocks, buying when they are out of favour and selling when they are riding high. Admittedly, this can be a fairly long-term speculation, but it has proved a reliable one.

• Consider these points before you make a purchase
  1. Don't buy an inactive share (i.e. a share in which there are few dealings). As a speculator you must always be able to sell as soon as you think it is the right moment. Inactive shares will have a large difference between the buying and selling price. Sleep with a lazy dog and you awake with fleas.
  2. Don't buy more of the same shares at a lower price. Once a share starts to fall it often continues on the downward path. A dried up cow goes to the butcher. Average up, never down.
  3. Don't let your political views cloud your judgement. Moral values are a different matter. The Ethical Investment Research and Information Service (EIRIS) set up by Quakers, Methodists, OXFAM and other church organisations provides an ethical analysis of the activities of many companies.
  4. Don't buy because you are attracted by the name of the company. You may laugh, but many people allow a name to influence their decision. Be wary of the sure winner. When you think you have a dead cert, think again. More people get stung by sure things than by bees.
  5. If the market suddenly rises don't rush to buy. You could be buying at the top price. There is often a reaction to a big rise. Buy on reactions. Sell on sharp rises in price.
  6. Never try to take revenge on the market. This is totally wrong and it could lead you into a reckless gamble. Buy only with a view to making money, not with the idea of making up your losses.
• Buy a share in the strongest group

The market does not move as one body. For example, the FTSE index may rise 100 points in a month, but the shipping and transport group index may actually fall. On the other hand newspaper and publishing shares may rise far above the average. Follow the Leaders and Laggards table in the Financial Times or on-line.

If you are playing the business cycle and plan to buy when you think that the bull is just waking up, go for a market leader which responds to an upturn in personal spending (consumer goods). Later when the boom gathers strength consider a switch to companies supplying capital goods such as machinery or engineering shares.

Remember, when you buy is often more important than what you buy. The market is in its strongest position when prices are weak and the outlook gloomy; it is in a weak position when prices are high and business booming. The strong have potential weakness. The weak have potential strength.

10 basic principles every investor should know

In the stock market there is no rule without an exception, there are some principles that are tough to dispute. Here are 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

• 1. Ride the winners not the losers

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:

Riding a Winner - The theory is that much of your overall success will be due to a small number of stocks in your portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

Selling a Loser - There is no guarantee that a stock will bounce back after a decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well, as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.

• 2. Avoid chasing hot tips

Whether the tip comes from your brother, your cousin, your neighbour or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; get into the basics by doing research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out but they will never make you an informed investor, which is what you need to be to be successful in the long run. Find out what you should pay attention to - and what you should ignore.

• 3. Don't sweat on the small stuff

As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few bucks difference you might save from using a limit versus market order.

Active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

• 4. Don't overemphasize the P/E ratio

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.

• 5. Resist the lure of penny stocks

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a Rs. 5 stock that plunges to Rs. 0 or a Rs. 75 stock that does the same, either way you've lost 100% of your initial investment. A lousy Rs. 5 company has just as much downside risk as a lousy Rs. 75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

• 6. Pick a strategy and stick with it

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

• 7. Focus on the future

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with one of the stock he bought demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought it as stock price already went up twentyfold. But I checked the fundamentals, realized that company was still cheap, bought the stock, and made sevenfold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

• 8. Adopt a long-term perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire.

• 9. Be open-minded

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Small Cap Index, and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.

• 10. Don't miss to diversify your equity portfolio

Its always wise to have stocks from different sectors and Industries. Do not expose your self to many stocks from the same sector. Be it IT, Consumers, Finance, Infrastructure, Pharmaceutical or any other sector, you must have a proper mix of all with suitable allocation based on future outlook of that sector and industry. Most of the companies from capital goods and Infrastructure sector have not performed since last 4 to 5 years but private banking stocks, consumers and pharmaceuticals companies stocks are making new all time highs. Hence, its important to stay diversified with your stock investments.