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Keep Your Cool

To make profits from the Great Panic of 2008, the 1st thing investors need to do is keep their cool

In the long run, investors will certainly be glad for the buying opportunity provided by the Great Panic. As we’ve demonstrated in the ‘Profit From the Great Panic’, once the stock market recovers, your profits will be higher if you keep investing through this current crisis.

However, for many of us the first step is to control our panic. When one’s investments fall to half of what they were at the peak, it’s difficult to be calm and rational about planning the future.

Here’s a simple four-step guide to keeping cool in the face of the crashing market.

Focus on the Real, not the Notional
Yes, the value of most funds is about half of what it was on January 14, but you didn’t make all your investments on January 14th, did you? Do yourself a favour and find out accurately what your real returns are.

You don’t have to bother about any complex calculations–just log on to your Valueresearchonline.com account, go to the Portfolio Manager and double check that you have entered all the transactions. Then, just click on the ‘Gain & Loss’ link. You’ll get an accurate up-to-the-minute tally of your returns–the rupee numbers as well as the rate of return for all your investments. Chances are that what you see will be far more reassuring than the notional loss that you are focusing on.

What’s more, when you read the detailed report of your portfolio on Valueresearchonline.com, you’ll also observe how the hot NFOs of the past year have crashed and burned while your long-term investments in diversified funds are holding up much better. We don’t need to say anything more about this, the story will be there in hard numbers right before your eyes.

Have a Plan
If you didn’t do this earlier, make a rough map of your financial future. Don’t just do it mentally, actually take a notebook or open a spreadsheet file and put it down. Put down all your big foreseeable expenses along with their probable dates. The first step in meeting your goals is to know what the goals are and how far you are from them. In the long run, having this plan will do more for your financial well-being than anything else.

Save More, Save Earlier
Around the world, the financial panic is rooted in people and companies trying to spend more money than they had. The first step is to save more money and start saving it earlier. The power of compounding is often referred to, but rarely understood. Saving Rs 5,000 a month for 20 years at 12 per cent p.a. gets you Rs 49 lakh eventually. But saving Rs 10,000 a month for 10 years at 12 per cent gets you only Rs 23 lakh.

The amount invested is the same and the return is the same, only the period is much less. It’s clear that saving more later in life is not a good substitute for saving earlier.

With the rise of the credit culture, many of us are simultaneously borrowing at high rates while saving at a lower rate. This saving doesn’t make sense. The first step to invest well is to borrow less.

Don’t Run Away
It isn’t easy to stick it out in the market when your investments are loosing money every day. Every time you check your portfolio, you end up thinking, “I wish I had sold out earlier.” The problem is that you couldn’t have sold out earlier because you didn’t know when the market would fall. And you shouldn’t sell now because you don’t know when the market will start rising again.

As demonstrated in the accompanying article, ‘Profiting from the Great Panic of 2008’, running away from the stock market during a crash is a bad idea. If you plan to invest for a long time, then buying stocks when they are cheap is what will boost your returns.

Today, a lot of great Indian companies are available at dirt-cheap prices. One day, you’ll regret not investing when prices were down.