Do you have what it takes to invest in equity?

Written by Team WFAN

Women Financial Advancement Network (WFAN) strives for a society where women join the financial system in an equitable manner to lead a more meaningful life.

September 15, 2021

The market benchmark is kissing its all-time high. This means, if you are an equity investor, your portfolio value too will look close to an all-time high. Many individuals have gravitated towards equity investing over the last 12-18 months thanks to the superlative returns and also the fact that low-interest rates are delivering rock bottom returns on fixed-income investments.

The one-way move in equity prices over the last year may have lulled you into a false narrative that equity returns are linear or move in one direction only. This is not an accurate understanding, investing in equity is a volatile affair especially for the first few years.

In order to benefit from equity investing, you need to focus on being the right type of investor. Do you have what it takes to invest in equity assets?

Ability to absorb volatile change

Between February and March 2020, the equity markets had seen a large fall in prices. Prices of individual stocks were down anywhere between 30%-70% in a matter of a month. It also didn’t matter whether the stock that corrected was representing a high-quality company, everything seemed to go through a sharp fall.

In such times, it’s easy to say that one should not do anything and very hard to sit still while you witness your portfolio value erode. At the same time, had you not remained invested, you would have missed out on the 120% up move in the market from then till now. Whether you invested in equity through stocks directly or through mutual funds or through other avenues like Smallcase, the risk is the same.

If you are not the one to sit still through volatile price movement, equity is not the asset for you and you should be cautious in allocating a large proportion of your portfolio to it.

Ability to be boring

Once you have invested in equity assets, you will see that there is a lot of change on a daily basis, just as we discussed above. However, matching your own excitement to this level of activity is detrimental. Investing in equity involves more patience and discipline rather than action. Once you have implemented your strategy to invest in equity assets, it’s important that you don’t change it often.

Moreover, you shouldn’t chase the next big stock idea, fund offer or the hottest fund manager every month. Doing that will result in a collection of stocks or mutual funds which are too vast to manage.

Lastly, keep it very simple and look at your portfolio value only once a month or once in three months. Being a successful equity investor, literally, requires you to invest and forget. Be as boring an investor as you can be.

Ability to know when it is enough

We have already discussed that ideally you should be boring and keep only a few stocks or funds that you want in your portfolio rather than chasing the next top idea. Along with that, also get a sense of how much return is enough. To do that you will have to match your equity returns with your goals. Think about whether you need that next 10%-20% return or what you have made so far is enough to fulfil your financial objective.

Chasing returns will also increase the risk, the risk of losing capital. You would rather keep your return objective to what you need for your goals, than going all out for return just for the sake of it. Multiplying returns beyond this need can happen with any surplus money or after that point in life where all your financial goals have been suitably achieved.

Until then it’s best to keep risk balance and focus only on enough return rather than maximising return.

Every individual can benefit from the long term compounding returns that equity assets offer. However, many don’t have the right behaviour and attitude to help them achieve this on a sustainable basis. Long term equity investing requires decades for the best outcomes to shine through. This sounds too far ahead and maybe we don’t want to commit to that, however, remaining invested, disciplined and regular is the only way to consistently build wealth. Investing in equity is easy and convenient today, but being an equity investor requires behaviour skills that you must master.

You May Also Like…

0 Comments

Submit a Comment

Your email address will not be published.