2025 RULEBOOK: Five important resolutions you can take now for a smoother ride in the markets through this year.
According to historian AJP Taylor, “Men only learn from their mistakes how to make new ones!” Nevertheless, as 2025 dawns, while as in any year, investing mistakes cannot be avoided, it is important to learn the important lessons that 2024 taught us so that we avoid repeating past errors. Here are five important resolutions you can take now for a smoother investing journey through 2025.
INVESTMENT/TRADING JOURNAL
2024 was quite a volatile year for markets. Small-cap and mid-cap stocks corrected in early March from the highs of February, reacting to SEBI’s comment that there were pockets of irrational exuberance in them and that mutual funds in this space should disclose the results of stress tests. Then there was General Election results-led volatility in June, though it was short. The second half of the year saw volatility due to the unwinding of Yen carry trade and other factors. If you were a speculator, the volatility of 2024 made it a year of opportunities. If you were an investor, you could have kept calm through these phases of volatility, but only as long as you did not panic looking at short-term movements.
To stick to your guns as an investor, it is important to have a pre-set investment strategy that helps you hold your nerves when markets are crazy. When you buy a stock, make short, crisp notes in four bullet points on why you are buying, your thesis for the stock and triggers to exit. When markets are acting crazy, refer to it and then make any follow-up decision if required. If you are a trader, maintain a journal with rules for entry and exit for every trade you make. It is common to find individuals mixing up investing with trading and vice-versa. Maintaining a good investment or trading journal will ensure you don’t slip from being a trader to an investor or vice-versa. Give this suggestion a shot and see how it works out for you in 2025.
LEARN TO LET GO
The year 2024 saw SEBI come up with a study that revealed 93 percent of retail traders lost money in the equities derivatives market. There was effectively a massive wealth transfer of $22 billion over FY22-24 from the bank accounts of retail derivative traders into largely the bank accounts of well-equipped institutional traders and pod shops. If this statistic was not shocking, even more surprising was how persistent retail traders were in continuing to trade in derivatives despite their losses and low odds of making money. Many dreams of ‘getting rich quick’ got crushed as the reality of F&O trading dawned upon them. But what was more disheartening was the inability of many to let go of past losses and start fresh. So many years are lost in attempting to recover past losses, which results in a loss of time that is many times more valuable than financial loss.
As we mentioned in one of our articles on F&O Trading – ‘The Great Indian Slaughterhouse’ – “There is no shame in making losses, but maybe there is when it comes to not dealing with it with maturity.” Whether losses in trading or investing burden you, own up to the losses, seek external help if required and start fresh. Don’t waste time regretting and missing out on new opportunities that markets will provide in 2025. Remember, 2025 is the first year of the rest of your investing life.
DIVERSIFICATION IS KEY
As the adage goes, “Don’t put all your eggs in one basket.” It is important to diversify across asset classes such as gold and debt. In the year gone by, while the Nifty returned just about 9 percent, gold saw gains of over 21 percent. This is because equity and gold react differently to global events, and the correlation between their returns is lower. This helps greatly in bringing down the portfolio risk.
“When you have uncorrelated or low-correlated assets, you can dramatically reduce your risk without reducing your return,” says one billionaire investor, Ray Dalio. Decide on your asset allocation based on factors such as age and risk appetite. Also, do not get greedy when an asset class rallies sharply. Rebalancing the portfolio periodically is as important as asset allocation itself.
INVEST LOOKING FORWARD
In 2024 and also in the last three years, stocks such as HUL, Asian Paints and Kotak Mahindra Bank have greatly underperformed the market and investors in these stocks have been left holding the bag. A classic case of investors’ recency bias at play after a glorious decade for these stocks between 2010 and 2020, and expectations that it will continue through the current decade as well. The pertinent question to answer before clicking the ‘Invest now’ button is: ‘Will this investment make money for me in the future?’.
It’s always good to go back to the basics and answer the question – ‘What really is the fair value of an investment?’. It’s always the value of future cash flows discounted. To quote the Oracle of Omaha, “The investor of today does not profit from yesterday’s growth.” That quality stocks bought at any price will continue to yield excellent returns was an offshoot of the zero interest rate regime in developed markets and, hence, is now likely a relic of the past.
PAY YOURSELF FIRST
For a few years now, after the pandemic, net household savings have been slowing, as indicated by the Ministry of Statistics and Programme Implementation statistics. While gross savings grew at 12 percent compounded, liabilities grew at a rapid 26 percent, driven by high growth in personal loans and credit card debt. Some borrowers’ financial hygiene went for a toss, and unsecured loan defaults have shot up. Financial institutions reported elevated delinquencies in this space in 2024. It was even common to come across cases of retail speculators trading with such borrowed capital.
A budget can be the best way to start setting your financial hygiene straight. To ensure you save consistently, remember this quote from the Oracle of Omaha: “Do not save what is left after spending; instead spend what is left after saving.” He calls this ‘Paying yourself first’. Creating mandates for your SIPs will come in handy.
Key Points:
Set up automated mandates for SIPs
Stay calm amidst highly volatile markets
Look at the future potential of an investment, not the past
