Investment strategy
With the current year likely to unfold some more pain before bottoming out, the current environment also offers some lessons for building wealth in the coming years.
Investors who have been unlucky by not participating in many bull runs in various assets, can strategise in a better way for the future. Direct stock buying in good companies could be one way or there are lot of mutual funds to buy from fund houses. Stock investments through mututal funds way give an edge to investor since he is buying stocks indirectly through fund house with backing of strong professional stock market research. At the same time direct stock investments let him participate in company's growth with maximum profits. Balancing your stock market investment with both mutual funds and direct stock buying in 50:50 ratio would be good strategy for building wealth.
Buy Low
The golden principle was almost forgotten in the last five years, largely because of unprecedented buoyancy in various instruments. Much of it was also because of the liquidity flow from domestic and overseas investors. With liquidity drying up and economic growth sliding down, the prices have been relentlessly tracing backwards with respect to most instruments.
While the picture may look gloomy and offer less conviction for investments, long-term investors need to use the current environment to buy. After all, those who buy cheap and sell high are the ones considered smart over a long period of time.
Sell HighWhile buying at a low is crucial, selling it at a high is an equally important component of wealth creation. The exit strategy could revolve around the market prices of your instruments, your liquidity needs or your allocation for a particular product. For instance, an allocation of 20 percent of your portfolio in favour of equity could go haywire during a market boom in equity and may account for 40 percent of your wealth. One of the options at such a juncture is to re-balance the portfolio by booking profits from equity and transferring them to debt or by increasing the debt allocation with the surplus funds.
Not only will such a strategy help in meeting your goals but will also ensure profit-booking which is an essential component of investment planning. On the other hand, the task of wealth creation can also be achieved if you have a long tenure at your disposal. In this scenario, risk management would be built into the investment process, as you would be staggering your investments, which in turn helps you in averaging out your costs.
Investment discipline
Another important component of the accumulation strategy is sustained focus and discipline. These are necessities though you need not stick to the same set of products at all times. For instance, if you have signed up for a systematic investment plan (SIP) in a smallcap fund for a period of five years, you can reduce the allocation in the current environment to that fund and shift it to a large-cap fund.
In fact, large-cap stocks or funds would be the safest bets for a long-term portfolio as they have the ability to sustain in market volatility in a better way. On the other hand, mid-sized and small companies offer the potential to beat benchmark indices, despite carrying some risk.
Irrespective of the choice of stock or mutual fund, no wealth creation is complete if you do not have the habit of monitoring the investments at regular intervals. With professional help being easily accessible, the task has become a lot easier.
