The Hindu Business Line : Trader's Corner

At any given point in time, there is always a story in the stock market that is cited to be a sure-shot winner, mutli-bagger, jackpot or whatever else it may be called. It can be Internet stocks one day, retail stocks the next, and realty stocks the day after and so on.

As more and more traders hear about the story and prices starts zooming, there is always the temptation to jump on the bandwagon and shovel in a large chunk of the portfolio in such stocks. That is not such a good idea.

Over-betting stems from over confidence and over-confidence, as we all know, has no place in stock markets. Betting a large chunk of your investment into any one idea can lead to significant diminishing of capital once the sector falls out of favour.

It is best to restrict exposure to any one stock to 2-3 per cent of your portfolio.

Diversification is the key to successful management of your investment portfolio. We talked about diversification within the equity portfolio in the preceding paragraphs. But the overall investment portfolio should also be diversified with money invested across asset classes so that the portfolio is cushioned from the vagaries of the stock market.

The exposure that an investor or trader has to the stock market should be related to his assessment of the market's trend. As the market starts looking over-bought, over-stretched etc., the exposure to the stock markets should be reduced and cash should be moved into safer avenues of investment. The extent of speculative activity evident in the markets can be used to guide the investors regarding formation of market peaks.

Revival of interest in penny stocks, increase in the number of stocks hitting 52-week highs, surfacing of scams etc. are some of the common symptoms of a market nearing its peak.

Similarly, as the market sentiment turns negative more money should be moved away from equities. It is not possible to take all the money out of the market or to move all the money in to the market. Scaling down the exposure is the second best alternative.

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