Want to make money from the stock market? Remember these 3 key rules

Do you have the same opinion about investing in stocks today? This is how he opened his chat with me. It was 27 years ago that I had met him at an investor meeting, where I was persuading the assured return seekers who refused to look beyond recurring deposits and monthly income plans to look at equity. I asked him if he thought those views were still valid. We completely agreed that the joy of long-term stock investing was long-lasting.

I still know people like him, frozen in the same mindset as they were back in 1997. The sharp decline in the market index from 4,500 levels to 2,800 levels in a few years left many spooked and anxious. While those levels for the Sensex appear extremely low, many investors remain on the edge. Even today, we only have a very small section of the population investing in stocks, ETFs, actively managed mutual funds, portfolio management plans, and all these forms of equity investment.

Equity investing offers a fantastic potential for growth and capital appreciation. There are only three rules. First, money is made on a portfolio, not from bets on individual shares. For every star entrepreneur who tops the list of wealthy people, on the strength of the equity holding in his business, some businesses fail. Having the humility to accept the possibility of making the wrong decision is vital. Owning a lot of shares in all companies is an effective, accessible, and economical strategy for small investors. Whether it's an index, mutual fund, or portfolio, opt for your preference but stay diversified.

Second, money is made from being with the winning stocks. But there is no magic formula to predict tomorrow's winner today. Instead, make sure your portfolio stays healthy by eliminating losers. Either you do this with your portfolio of stocks or you invest in mutual funds and portfolio programs where the manager does this. An index ETF is your lowest-cost portfolio whose formula is revised to a formula to stay with the top stocks.

Thirdly, to ensure success in both of the aforementioned processes, give your investments enough time. Markets go through cycles of euphoria and despair, influenced by the large number of people expressing their opinions on listed stocks. Their motivations vary widely. Businesses face ups and downs. Some thrive while others fail. These events take time to develop. As a stock investor, his conviction is built on the enduring presence of many thriving companies. Their losses occur when all current and future businessmen completely lose hope. However, the human race is usually better than that.

But I'm saving for my son's education, protested a friend who had heard these arguments I've been making for a long time. Will you need it in the next two or three years? I ask: No, I will not touch it even if I have to, because it is for the sake of the child’s future. Precisely for this reason, it is suitable for investing in stocks. You can wait and withhold access to funds. Market fluctuations scare me, he says. It is not necessary to invest the entire amount, but maybe 60% in equity and 40% in the current deposits?

If the goal needs a large sum of money, you either save more or earn more. Investing in stocks provides this opportunity to earn a better return. If your need is at least 10 years or more, there is a good chance you can take advantage of volatility and perform well. If you don't touch the money, you don't have to keep looking at its value either.

“Does this apply to me now that I have retired?” asked an elderly relative of mine who was hearing this story. This is only the savings I have, from a lifetime of work. How can I stake it in the equity markets that look like a glorious gamble, he asked. Many equate equity investing with picking stocks and betting on them randomly. That gamble and speculation is just the daily face of the day-to-day market. The fundamental value will reveal itself inevitably. You can either stand in the street with the gamblers or be the discerning investor who holds a portfolio of good picks, revised as events unravel. He seemed to agree with the latter position. Many like him hear and believe, the gamblers and dismiss the portfolio view as sales talk.

Retirees usually do not intend to exhaust the last rupee from their savings. Even if not intended, there is always a portion left for the heirs. That portion has two features: it was not accessed all through retirement; It would go to someone who has a longer time frame for investing. That makes it an ideal candidate for equity investing.

Consider a 30% equity allocation. This might represent a portion of the corpus that you won't need or draw from. But the upside is that this portion will grow and appreciate as the years go by. It might offer a great buffer if you like to draw something later in your retirement. The appreciated value will give you the confidence to use it if needed.

Would this be applicable if I am still earning and saving for retirement, asked a middle-aged man. Wouldn't I be risking my precious retirement corpus by investing in something as risky as equity? Across the globe, pension fund managers face scrutiny from their boards if they do not allocate an appropriate portion of investments to equities. Place at least half the corpus in equity investments, I would recommend.

Equity allocation in a portfolio for a retirement corpus ticks all the boxes we have discussed. The money is not immediately needed, and it can stay invested for the long term. There is adequate regular income to take care of needs if the markets go through a downturn. There is no dependence on this corpus for short-term and immediate needs. Changes in the value of the corpus from market cycles do not impact everyday life, but staying invested enables capital appreciation and growth.

The case for equity investing is strong and persuasive. What hasn't changed over the past 27 years is that people view stock markets as the place to make a quick buck. They hear stories of windfall gains and want it. They seek tips and names to bet. To invest in an index systematically and simply participate in the run seems boring and unappealing to most. That is a tragedy.

Also Read: What is IPO - Initial Public Offerings? Pros and cons of investing in IPO?