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Rattan Chugh
ExpressMoney
Monday, October 02, 2006 at 1044 IST
Creating wealth isn't the Preserve of investment gurus. Take these five no-brainer strategies, get some discipline and you are on.
Investing is a lifetime activity, where persistence, patience and time are the keys to success. As you build assets over time, it is imperative you monitor them to maximise returns. Here are five strategies and thoughts that can help you in this objective. |
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Average Your Cost |
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Cost averaging is the central principle behind systematic investment plans of equity funds. You invest a fixed amount every month. So, when the market rises, your investment will buy you fewer units. And when it falls, it will buy you more. Through market cycles, it reduces the average cost of your holding, while relieving you of the onerous task of trying to time the market. In the short run and in a bull market, cost averaging may trail a lumpsum strategy in returns, but over a longer term and through market cycles, this strategy has proven to be a winner (See table: How cost averaging works). |
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| Take some risk |
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Risk and returns go hand in hand. An approach to minimise risk may result in mediocre returns. The contrast becomes stark over the long term. Let’s assume an investment of Rs 1 lakh earns three rates of returns: 8 per cent (pure debt), 11 per cent (balanced) and 13 per cent (pure equity). The difference in returns gets steeper with time: from 25 per cent in five years, it expands to 57 per cent in 10 years, 97 per cent in 15 years and 147 per cent in 20 years (See graph: Widening gap). |
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Keep Rebalancing |
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Review your investment portfolio periodically to assess whether it is in line with your desired asset allocation. Say, you have a portfolio of Rs 1 lakh with a 60:40 equity-debt split. Further, assume a bull run in the stock market earns you 30 per cent on your equity portion after a year (Rs 18,000), while the debt portion earns 8 per cent (Rs 3,200). Your portfolio is now worth Rs 1,21,200, and the split stands at 64:36.
If equity returns continue to outpace debt returns, this ratio may get skewed towards equity. If your financial goal is still far away and you don’t mind the risk, you can choose to let the profit run and not bring your portfolio |
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back to your original 60:40 split. However, if you don’t want more risk, book part of equity profits and reinvest in debt. In another scenario, if equity returns less than debt, sell some debt and reinvest in equities. By doing so, you are also booking profits in rising markets and increase holding in falling markets. |
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| Sell the duds |
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Review your portfolio dispassionately. Hold on to investments that are performing well. At the same time, exit underperforming investments. By holding on to laggards, you lose out on the power of compounding, as well as the chance to earn a better return elsewhere. Imagine, if you got a bonus of Rs 50,000, you will invest it in the best avenue possible. But if it is lying in an underperforming investment, you won’t follow the same thought process. |
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| Stay disciplined |
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When you invest in any asset class where there is ‘risk’, have a gameplan. Define your upside, identify a ‘stop-loss’. Once you have defined these parameters, follow it up with action. Once your target return is achieved, exit don’t think, I’ll wait for the stocks to rise 10 per cent more. Likewise, if the stop loss is hit, exit don’t stay on in the expectation of a rebound. The above strategies may apply differently in different market conditions. It is therefore essential to seek professional advice for best results. |
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