A few ground rules that will help first-time investors to take flighty markets in their stride.
Are the ups and downs of the market and wild intra-day swings making you dizzy? Investment experts warn that market volatility is something that we all have to live with as global markets get increasingly integrated. How can young investors, who are starting to stash away their savings towards long-term wealth building, deal with the risks associated with these flighty markets? Here are a few ground rules for investors who are just starting out.
Markets are in a volatile phase and are now tuned to global cues, with valuation concerns also building up. Long- term investors with disciplined investment style and who invest in keeping with their risk profile will, however, be winners at the end of the day. Buying opportunities can be considered during market corrections. Investors should try to time the market. Ups and downs in the Sensex are, after all, a part of the game. One could rope in a private banker who does wealth planning for life after retirement.
Planning and portfolio review should go hand in hand. One needs to review investments and iron out flaws in a regular manner. Power of compounding and systematic investment planning goes a long way in wealth accumulation.
One should take time to go over the top, especially after reading the pitch and the bowlers. Research reports and quality of advice should be carefully considered before going ahead with one’s investment.
One has no control over the markets’ behaviour, but we can control our animal instincts and herd mentality with realistic return expectations from various asset classes. Remember that to earn a higher return, one needs to take higher risks. However, such risk-taking acts should be accompanied by long duration calls.
Understand the realities
The stock market is not a place where you can make a quick buck. You need to stay updated on market developments and restructure your portfolio over a period of time. There used to be a time when gilt and debt mutual funds delivered returns in the range of 20 per cent, following a decline in interest rates.
Then we witnessed the ‘Goldilocks’ effect, where a combination of low inflation and high real GDP growth rates and attractive valuations set stock markets on fire.
Now, markets are entering a mature phase with some room for interest rates to rise. Soaring crude prices are creating worries on the inflation front.
Therefore, one should try to link one’s return expectation with the changing global outlook. One should revisit the financial planning at different stages of one’s life cycle. The key to successful planning lies in better control over emotions through market ups and downs.
Believe in stock market cycles
There are no permanent bull and bear markets. Be a disciplined investor and avoid speculating.
One should always keep an eye on the bigger picture and evaluate investment objectives to be achieved over one’s lifetime. India is on the way to experiencing economic prosperity owing to favourable demographics, outsourcing, consumption, innovation, and political stability. This is likely to ensure that the Indian stock market remains centre-stage.
For the slightly aggressive investor — Put 50 per cent in a large-cap fund, 35 per cent in a mid-cap fund and 10 per cent in a dividend yield/opportunities/flexible investment fund and 5 per cent in an ELSS fund.
Stick to the asset allocation in tune with your risk profile. That is, the weight to each class needs to be adhered to. When your exposure to a particular asset class, say equity, has gone up beyond the accepted level, you may have to trim your holdings by way of profit booking. Similarly if the equity exposure declines from the stated level, one can try to increase the allocation to equity. Mutual funds are convenient investment vehicles for not-so-savvy investors.
Wealth Management tips
Leveraged equity investors should use the continued rally in the market to rebalance their portfolio.
Existing equity investors should consolidate their positions going forward and their portfolio should reflect their risk profiles. Those investors whose equity portfolios are out of line with their risk profiles should cut exposures during market upswings.
New investors should use this as an opportunity to consolidate and diversify their equity holdings to reflect their risk profiles.
Wealth managers should re-assess the investment objectives of their clients at regular intervals.
Risk reward is now in favour of investing but speculation should be avoided.
Investors are advised not to panic, as some of the adverse market swings are a matter of global investment triggers. They should seek the advice of wealth planners.
Always keep in mind that investment planning is a long-term process.
Investors should note that higher return always come with relatively higher risk taking.
Investors should make use of their due diligence to fully understand the nature of the investment they are making.
Last, remember that wealth cannot be created overnight and there are no short cuts to investing.
Investors should reassess their risk appetite in every market downturn as a routine health check to align one’s future goals with their portfolio performance at regular intervals and effect changes, if required.
(Sourced from ICICI Bank’s Investment Review Half Yearly Edition – 2007)