Investing in equity markets – Few basics revisited
These days social media is abuzz with investment philosophies, strategies, quotes, predictions, stock tips to invest in equity markets and make a fortune. Price targets, potential multi-baggers are all around and the temptation to invest in one go to make a fortune quickly seems very compelling. Retail investors already investing in equity markets or have just started must trend caution and invest keeping in mind the very basics of investing and not gets distracted by such temptations to make quick bucks.
Let’s again revisit the very basics of investing for the benefit of retail investors:
Goal-based planning is a must – Goal-based planning is a must for any household. Its a serious exercise which you must carry out with your family as it will give you a reality check about your finances and what are the gaps involved. Take inflation-adjusted figures into consideration and you will be surprised with the steep corpus you will require for some of your goals and per month investment you will need to do to achieve it. Goal-based investing will give you a reality check, will keep you focussed to invest regularly, clarity of thought to invest regularly to achieve your goals and will curb unnecessary spending.
Stay with quality always, – always means always – Over the years, in spite of different strategy meets, investment conferences, investor education program – basics of investing has not changed i.e. Quality businesses will deliver tremendously over a long run. There will be questions raised as to ‘in equity, nothing is guaranteed’ etc. but again, I want to stress on the fact that – ‘Quality will deliver phenomenal returns to investors over a long run’. So stay with the quality and never let your guard down on this significant investment parameter. Keep only those businesses in your portfolio for which management quality is exemplary, consistent growth outlook, progressive management, a leader in the sector to name a few.
Don’t sell your winners till fundamentals deteriorate or you need money – There are times when you find a lot of brokerage houses cuts target of quality stocks just because it has run up a lot and valuations seem stretched. To the contrary, they will suggest investing in low quality, low P/E stocks which have miserable fundamentals. Don’t be in a hurry to switch out if the growth story remains intact, fundamentals haven’t deteriorated, management is of utmost integrity and company is generating excellent numbers q-o-q. Take your call after complete analysis but have conviction in your holding. High growth will take care of high valuations. Just, for instance, some of the quality businesses have remained richly valued throughout the last decade but have been compounding machines throughout. Such business stock prices can remain stagnant for years together and then move up in a hurry. Such holdings are an excellent high quality, low-risk compounding machines.
Stay hungry and don’t procrastinate – As an investor, you need to be focused on your goals and review your portfolio regularly. It doesn’t mean you check stock prices or NAV daily but have a quarterly portfolio review and if any modifications are required – do it without fail. Don’t procrastinate and if you tend to do it at times, go and read about the power of compounding. You will understand why you need to immediately get going. Always have an eye on quality businesses and don’t miss an opportunity to grab them with both hands when the market gives you that opportunity which market give at times. It doesn’t imply you are trying to time the markets. It just means that you are adding to your monthly allocation of stocks or mutual funds when there’s a downturn due to unrelated global or domestic factor. Have your regular investments in monthly auto-trigger mode (preferably SIP) and increase it by a certain percentage year on year as your salary increases. It will do a world of good to your end corpus.
Don’t try to copy investment portfolio of experts – Retail investors tend to follow herd mentality and invest in businesses which experts have bought into or have recommended against. Don’t let your investment philosophy deviate from its normal course. Experts can have a varied risk profile which may not be fit for you and they may sell anytime leaving retail investors in a spot of bother. Always invest as per your risk profile and don’t keep on adding X number of stocks from X number of expert’s portfolio. Your portfolio should not be a garbage bin but a collection of high-quality businesses for wealth creation. You should be proud of businesses you hold in your portfolio. Keep your investment portfolio strategy simple and effective.
Mutual funds can test your patience big time but stay put – For retail investors, mutual funds are a great way to create long-term wealth. Investors often underestimate the power of compounding of which mutual funds are an excellent medium. Having said that investors must possess patience and keep investing in a good quality diversified portfolio and increase their investment in line with your goals over time. Don’t try to be over adventurous and follow simple and consistent investment philosophy. Good and quality mutual funds have generated excellent returns over the long term. Retail investors find mutual funds boring and stock trading exciting which is not an appropriate way to approach your long-term investments.
Be aggressive during initial investing days – If you are young and just earning, Equity Linked Savings Scheme (ELSS) must be seen as an excellent instrument to not only save tax but also start wealth creation journey in a best possible way. Don’t add traditional insurance policies which not only eats into your investible corpus but also generates poor returns. Buy a term plan for insurance needs and dedicate rest of corpus to create wealth. Tax saving is not limited to submitting proof to your employer at the end of the financial year but serious wealth creation. Some of the ELSS funds have created serious wealth for investors over a long run.
Avoid investing in direct equity, to begin with – It’s always better to start investing via mutual funds for long-term goal so that you as an investor get a good sense of market fluctuations and develop a habit of saving and investing regularly month on month. Initiate investment based on your goals and have specific funds for specific goals based on your goal’s time frame and risk profile. Retail investors tend to invest in direct equity, buy the flavor of season stocks and end up losing big sum in equity markets. More than that, you lose precious years of serious compounding which you repent 5-10 years down the line when the realization sets in. Have your investment go through various bear and bull phases and enjoy the power of compounding. Get started with mutual funds and as you attain the experience of going through bull and bear phases, evaluate investing in direct equities but with the utmost caution, only if your risk profile merits such an investment, otherwise stick to mutual funds.
Don’t shy away from selling your underperformers – We are human beings and do make mistakes but a smart investor ensures taking corrective measures as soon as the mistake is realized. Don’t shy away from exiting the underperformers without any delay.
Term plan, medical insurance, and an emergency fund are a must-have – A strong foundation is very much required for a successful financial planning and an adequate term plan, medical insurance, and emergency fund provides an investor with a strong foundation. Leave yourself underinsured or with inadequate health cover will always keep your investments at great risk of bulk redemption. The emergency fund must also be adequate to cover your 3-6 months expenses.
As we conclude, do remember what I said at the beginning of the write-up i.e. basics of investing has not changed at all and will never change. We as investors must realize this immediately and should draft out own investment plan in accordance with our goals and risk profile, plan which is well understood and appreciated by us as an investor and not copied from elsewhere.