Chapter 5 :- Thumb rules for equity investing

Thumb rules for equity investing
Thumb rule No। 1:

(100 minus your age)

If equity is the best bet for brisk growth of our savings, then the logical question is how much should we invest in them either directly or via mutual funds?
The standard rule of thumb to determine your ideal equity exposure is a simple formula that suggests you subtract your age from 100. For example, if you are 35, then 100-35 or 65 per cent of your portfolio should be exposed to equity.
While this can be taken as an indicative formula, it would not, of course, be applicable to everybody at every point in their lives. For example, if you are a 30-year-old and part of a double income family with one young child, you could put in 70 per cent of your investments into the market.
However, if due to a sudden turn of events, you also have to provide for dependent parents and siblings, you should change your allocation and tweak down your equity exposure।

Thumb rule No। 2:

Keep debt-equity proportion constant. If the age-based thumb rule does not apply to you, use a tactical allocation thumb rule. Here, you start off by investing, say, 60 per cent in equities and 40 per cent in debt, and continue keeping the ratio constant at all times.
If you find at the end of the year that equities have done well, you should trim your equity exposure in the next year, the assumption being that there is likelihood of a market downturn। However, in times of a long-running bull market, like the one we have been witnessing, this strategy may not be ideal.

Thumb rule No. 3: Factor in the trend। This thumb rule on trend-based asset allocation is the opposite of the previous one. The assumption in this one is that if the stockmarkets are going up, then that is the trend of the cycle, and you should enhance your equity exposure for the next year. Of course, trends could change and you might be trapped with a high equity exposure in a falling market.

How to follow the thumb rules. :-Since the thumb rules tend to contradict each other, you can adopt the following approach। Use the '100 minus age' formula if there is nothing exceptionally different in your profile and the assumptions fit you।

Keep that as the guiding number, and tweak it upwards or downwards depending on your specific circumstances. If you are in your mid-30s and single, you could invest more than 70 per cent in equities. If you are 60 and do not see yourself retiring for another eight years, you could invest more than 40 per cent.

Chapter 4 : Intraday Trading

GYAN :- For the uninitiated, Intraday trading is the buying and selling of shares on a particular day. The delivery of shares does not happen. Now the interesting thing in intraday trading is that you can make money in a falling market too (its called shorting). Another interesting thing about intraday trading is that you get high leverage, up to 15 times depending on your depository participants.

There has been lots told about Intraday trading. Most(infact nearly every one) say its a gamble and it only makes your broker richer. Having done significant amount of research about intra day trading, i decided its time to take the next step and try it out. I chose to defy others belief that its a gamble. After all there is a thin line that separates intelligence from stupidity. ( You get to see this especially in cricket. In case the batsman steps down the track and hits the bowler for a SIX, he is considered an attacking batsman with a lot of courage. And in case he misses the ball and gets stumped, people would say that it was a reckless shot and that it was stupid on his part ) Even so, the other day in my tax class when the teacher was talking about Capital gains tax, a student asked her,"Ma'am what about intraday traders ?". And then with a sarcastic smile she replied,"They make money and lose it too, and in the end they dont pay any tax as they dont make any profits ?". This irked me even more, and increased my resolve to prove that intraday trading was not a gamble if you know how to go about it.

After class, I ran back to my room to prove my point. The pick above is graph of the nifty index today. So based on all the information i gathered for the day(about weakness in global indexes) and the familiar pattern that the nifty was charting, I took a short position in 2 scrips at around 12:30. And as expected the market began to slide down and my profits shoot up. With a smile on my face, I was just thinking - "Wish i could show people that Intra-day was not all about gambling". And so me waited and waited for the markets to slide further so that i could maximize my profits.

It was around 14:20 and as i was waiting for the markets to bottom out, the unexpected happened. The market started bouncing back up. And i saw my pot of gold shrink. It shrunk and shrunk and shrunk, till it actually vanished. Infact it ended sligtly in the red. I dont know what made it go up, probably heavy buying by FIIs or MF houses or the unwinding of short positions. But there i was sitting blankly in front of my laptop. The smile of achievement turned into a frown of disgust. And then those voices started playng in my head. I was getting back images of my teachers sarci smile and her comments on intraday trading.

Uff.....In disgust i just shut down my laptop. My mind was forced to accept that its a gamble, but my heart said NO. Well, I guess its because thats how i have been brought up or its just me being me - To question perceptions or beliefs..!! Having said all this, I would be staying way from Intraday and probably even the market itself. Would look more into MFs as a means of investing and just crush those dreams of being the next Warren Buffett. To be more precise, I will be just another drop in the ocean...