Market tips for financially sound '09

The year 2008 has been quite turbulent for investors. From an all-time peak of 21,206 in January, the BSE Sensex plummeted by more than 50% to 9000 levels in December.

Networth of equity investors has halved. The global slowdown has also had its impact on the job sector, which has added to investors’ woes. Let’s take the example of a cloth merchant.

He bought a stock when it was just priced at Rs 3. Subsequently, the scrip rose to Rs 120 when his financial advisor asked him to sell the stock as it had no intrinsic value.

The artificial rise in the price, however, made him stick to the stock. Now, it’s trading at Rs 12. The biggest lesson the businessman learnt was every asset has a real value.
Kartik Jhaveri, a certified financial planner, says, “Whether it is real estate or stocks, there is a fair value. Some exuberance would have propped up the value of a stock worth Rs 100 to Rs 400 but that doesn’t mean the stock will touch Rs 800 for you to book profits in the future. Similarly, real estate prices move in line with inflation. If you have booked a flat worth Rs 10 lakh, you can expect an appreciation of 8% in a year. Anything in excess would be artificial, which would eventually crash.”

The year also taught you that things that look rosy can actually turn ugly in a short span.

“If you have a steady income, ensure you at least save 30% at all times. If the times are good, you can easily save up to 50% of your disposable income, which can be of help during a contingency,” Mr Jhaveri adds.

Another lesson learnt is to avoid over leveraging. This simply means if you can afford only a 2 BHK, stick to it. Till 2004-05, some banks were willing to finance 90% of the property value.
Now, it’s the borrowers’ headache to foot that expensive EMI at such turbulent times when their investments are underperforming.

At any point in time, a borrower should not borrow in excess of 70% of the house value. If you are planning to buy a house now, the loan-to-value ratio should be still lower at 60:40. That will give you additional flexibility to deal with your finances.

Also, it’s a bad idea to borrow for investing in stocks.

“Restrict your stock exposure to the personal funds you can use as no asset class can appreciate forever. Investors particularly borrowed to invest in IPOs. But investing in IPOs turned out to be the biggest joke in 2008,” says Amar Pandit, a certified financial planner.

Finally, remember what suits your best pal isn’t exactly what you need. If he entered the market around 10,000 and exited near the 15,000 mark after booking profits, you don’t have to adopt the same strategy.

You can build up your reserves now and capitalise on many more bull runs to come. However, the underlying assumption here is that you should stay invested up to at least 5 years to withstand the highs and lows.

Moreover, at such times, you should lock your money in instruments that have the least exit penalty. This flexibility is essential to encash for upcoming lucrative opportunities.