Follow our advice to protect your investments and see your wealth grow in the long term
Building a sound, long-term, investment portfolio is a natural and logical aspiration for most of us. But for many, it gets delayed or remains unfulfilled, because of the initial stumbling block—how to go about it. Here are a few useful pointers:
Asset allocation and diversification
An ideal long-term portfolio involves a combination of multiple asset classes such as equity, debt, real estate and gold, among others. Further, each asset class comprises of a broad variety of sub-asset classes. For example, within equities, one can have variants like domestic vs global equities, large- vs mid- vs small- cap, growth vs value, etc. A suitable asset allocation, i.e., a combination of these asset classes in a unique ratio, is the cornerstone of building a robust portfolio. It differs for each investor according to weightage given to each asset class, based on their individual risk appetite, time horizon, liquidity needs and financial goals. There are always periods when one asset class relatively outperforms the rest. Given that asset classes are not perfectly correlated, and could, in fact, be inversely correlated in some instances, investing in different asset classes helps the investor benefit in the long term.
Periodic review and re-balancing of portfolio
This is as critical as deciding the asset allocation strategy. Regular portfolio reviews help investors to evaluate the performance of their investments vis-à-vis benchmarks and expected returns. Regular portfolio reviews also help investors to re-balance their portfolio if required, in case the weight of one asset class increases or decreases due to market movement. For e.g., booking profits when a particular asset class has rallied, or adding to it in case of a correction, always helps maintain the right mix.
Discipline and long-term approach
When most of us start building a portfolio with specific goals in mind, the intent is to build a healthy corpus for the long-term. Unfortunately, like our new year resolutions, we tend to execute it with limited discipline. Short-term priorities take over, or irrational market behaviour makes us act based on fears of the near future, all of which is completely avoidable. Just like a plant needs to be nurtured well to bear fruits, your investments need time to reap sweet fruits. An approach that investors could consider is investing in Systematic Investment Plan (SIP), which is the most time-tested and evergreen way of investing. It provides perhaps the most disciplined way of investing in equity and debt markets alike.
Timing the market
As humans, many a times, we are tempted to time the peak and bottom of an asset class. History has proven time and again that it is impossible to do so. Hence, it is recommended not to chase this mirage. Keep in mind that over a period of 10-15 years, it is really immaterial. Instead, it’s always helpful to focus on what an investor can control, like selecting the right product, etc. Also, when you try to time the market, you get too carried away by the hype in social media etc. It is important to cut the noise and focus on relevant information.
Keeping emotions away from investing
Investment decisions should be as scientific and objective as possible. However, as an investor, many a times we get swayed or influenced in decision making, which is bound to hurt the portfolio. A classic example would be if one has made an investment in a stock with the hypothesis that it’s a value buy, and it turns out to be a value trap instead. Here, it’s prudent to cut the exposure and reallocate to a better investment idea. For any investor, it’s difficult to book losses, but if not done, it can continue to hurt the portfolio.
In conclusion, irrespective of the investment corpus, investors should follow the basic principles of investing to be able to do justice to their investment capital and long-term goals. It is also advisable that they seek professional consultation while building their portfolio.
The writer is CEO of Wealth Management at Equirus
DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.