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Old 03-21-2010, 08:13 AM
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Default Strategies to invest in the equity markets

The portfolios eroded by almost 60-80 percent. As the markets turned the tide and rallied, many of these investors did not buy any stocks with the belief that the rally will be a shortlived one. The rally, however, was not a short-lived one and is still going strong nearly a year after it began.

The US Fed's decision to keep the interest rates low for an extended period indicates that the higher liquidity will probably extend the rally by a few more months. In that case, what should investors do? How should they get back into the stock markets to start earning returns?

Assess the damage

The first step for re-entry into the stock markets would be to assess the damage done to the portfolio due to the recession.

What was the value of the portfolio in the beginning and what was the percentage of loss, and what type of investments took the biggest hit in value.

This kind of damage assessment will give an indication of how aggressive you have to be to recoup the losses and put your portfolio on the right path.

Assess individual companies

To take a decision on whether a company is worth holding or not, it is necessary to assess each stock in your portfolio.

Check the financials of the company for its robustness. Scan through research reports for any updates on the management and their vision for the company.

After some due diligence, reach a conclusion on whether the company is worth investing in or not. If the stocks are of good quality, perhaps it makes sense to take advantage of small declines to buy more of them.

If the company's fundamentals have been adversely impacted due to the recession, it may make sense to off-load the holding and purchase other stocks, or simply place the proceeds in a money market mutual fund till it is required again.

Assess macroeconomic fundamentals

Any company can perform well only if the macroeconomic fundamentals are favourable.

As an investor, it is very important (often over-looked) to track how commodity prices (such as oil, gold, metals etc) could impact a particular sector or a given company. Factors like inflation and interest rates should be on your tracking radar.

If investors do not track economic macros on a regular basis they could be missing out on how the stock market will treat their portfolio.

Assess risk tolerance

Risk tolerance level of any individual keeps changing due to external factors or due to events that are specific to the investor.

So, the risk tolerance level has to be reassessed regularly. Similarly, the risk tolerance level of an investor could have changed due to the impact of recession on the portfolio.

For example, there are questions like can the investor afford to have further decline in his portfolio? Can he afford to lose even more money? Can he afford to go on the offensive? All of these questions should be pondered over before getting back into the markets.

Assess investment horizon

Any portfolio is structured with a definite investment horizon in mind. If the portfolio was dormant over two years, the investment horizon tends to change.

It could change due to recession, as it can cause portfolio values to decline by say 20-40 percent. Determining the investment horizon anew will help in deciding on the action plan for the portfolio.

Decisions like should the portfolio be expanded, sold off or churned to readjust to new time horizons need to be made.

Assess ability to infuse cash

If some stocks in the portfolio have declined sharply, additional cash can help in averaging out the cost of investments in the particular stock.

Managing equity investments is not easy. It is particularly hard if the portfolio has been dormant and taken a big hit due to extraordinary events that unfolded in the last two years.

However, investors should be prepared to reenter the stock markets and give themselves time to recover from bad investments. The time is ripe for them to retune their portfolios to harvest returns from the next bull market phase
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