Some guiding principles for your equity investments

18 Dec 2019

Movements in equity markets are never a one-way journey. At times, you may see a secular bull run, where all or most of the sectoral indices are in the green, whereas at other times, you may see red all over your trading screens as stocks fall like nine pins. A lot matters on how you perceive these changes. People display extreme behavioural attributes during such bouts of heightened volatility. This results in buying stocks at overbought or higher levels and selling shares at lower levels, which is not suitable for the overall portfolio returns.

So, there are some basic principles of investing which you should be aware of regarding equity investments. In this blog, we will discuss some guiding principles to safeguard your investments.

  • The essential difference between Investing and Trading - Investors and traders apply very different approaches, depending on their goals, as there is a vast difference between investing and trading. nvesting entails building wealth gradually over an extended period using the power of compounding. Trading, on the other hand, involves more frequent buying and selling of stocks, to generate quicker returns. Trading is a method of holding shares for a relatively shorter period. It could be for a week or more often a day.

    A trader holds stocks for a quick turnaround, whereas, investing is an approach that works on “buy and hold” principle. Investors invest their money for some years or even decades. Both trading and investing imply a risk upon your capital. However, trading comparatively involves higher risks and higher potential returns, as the prices might go up or down in a very short while. Since investing is an art, it takes time to develop expertise.

  • Indiscipline and lack of patience - Your investment is at risk if you do not possess the two most critical behavioural traits of discipline and patience. The patience required for investing is a vital part of financial discipline and shows how well you can check your emotional state, greed, and manage money to achieve your goals. Along with patience, discipline in investing should also be maintained, irrespective of the market movements. You can't say, “This decline is so painful; I can’t put more money in stocks now.” You won’t be successful if you don’t stick to a disciplined approach. Always keep in mind the proverbial saying in stock market parlance – it is not about timing the market, but about spending time in the market, which is essential.
  • Equity investments vs fixed deposits - A bank fixed deposit is structured in such a manner that it enables the deposit holder to earn a fixed amount every year, whereas, on the other hand, returns from equity investments are not strictly linear. Thus, it will be extremely unfair to compare excellent and steady yearly returns from fixed deposits with negative returns from equity over a relatively shorter period. The purpose of equity investments is to create long term wealth through growth and appreciation in the value of your investments over many years. In contrast, the use of conservative and safe-avenue traditional investments like bank fixed deposits is to give you safe, steady and regular returns, which, however, may not be enough to beat the real inflation rates.
  • Expected return on investments - Evaluating stock performance is very individual to each investor. Just as every person has a different level of appetite for risk, plans for diversification and investing strategies, so too does every investor have different standards for evaluating stock performance. One investor may expect an average annual return of 10% or more, while another may look to add to his portfolio with a stock that is not correlated with the stock market as a whole. Considering equity, you have to buy and remain invested over at least seven years (as commonly cited by most market experts) or even longer because equity investments are best suited over a longer-term. You will know very little about long term investments if you look only at the annual performance or a single year’s performance. Thus, do not expect your equity investments to deliver positive returns year after year or for that matter to outperform other equity portfolios and benchmark indices return every year.
  • Short term vs long term factors - Many external factors and macro conditions have a bearing on the equity markets daily. Monetary policy and repo rate changes, movements in international crude oil prices, the trajectory of inflation, and policy announcements of the government are some of the critical factors that have a significant long term impact on stock prices.

    Stock prices also move up and down every day due to other macro conditions of a particular stock or industry. There may be some short term factors, while others may be mostly long-term in nature. You should not pay attention to the short term noise in the market as this will only destroy value instead of creating it. Stick firmly to your asset allocation plan and focus on pure quality investments only.

    An investment in equities brings elements of risk, and the investor must balance the potential risk with the possibility of reward. Now that you have understood some of the salient guiding principles of equity investments, you should work towards improving your returns from such investments and protecting yourself (and in turn, your portfolio) from all the chatter and noise which the daily ups and downs generally bring along.

Happy Investing!

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.