Dos and don’ts of successful equity investing

The Indian stock markets have been at the center of much discussion and debate since the declaration of the 2019 general election results. For the first time in its history, Sensex breached the 40,000 mark post the exit polls prediction. Even Nifty crossed the important benchmark of 12,000. In spite of some corrections in the market, the general mood still remains upbeat. This exuberance in the markets is rubbing off on the retail investors too. 

Evolving retail investors

The trends, as seen in the investment patterns, indicate that retail investors are showing an increased affinity towards growth options, like equity and mutual funds. Compared to their predecessors, the current generation of investors is open to investing in avenues which help in wealth creation rather than just relying on FDs. A look at the rapidly expanding mutual funds’ industry vouches for this shift in the preference of retail investors. Though overall equity participation is still low, market upswings, like those witnessed post elections, creates a yearning amongst retail investors to understand equities better and tap its potential. 

If you too want to take the equity plunge or widen your equities exposure, here are a few dos and don’ts for successful equity investing.

Dos

Research - Read up extensively to understand various market concepts. Learn about the company, its product/service, its management and the financial reports before picking up its stock. This knowledge will improve your chances of investing in healthy stocks, leading to financial gains.

Patience - Most retail investors feel tempted to sell off their holdings as soon as their stock prices touch a high. This ‘trading’ approach is quite contrary to the ‘investment’ approach. Equity as an ‘investment’ offers inflation-beating returns but in the long-run. To give you a perspective, data shows that equities grew at CAGR of ~16% from 1979 to 2018, a period of 38 years. Apart from better returns, holding on to your investments for long duration also minimize the risks associated with equities. Once you invest in fundamentally strong stocks, be patient to get the desired returns.  

Diversify - Overexposure to a specific sector/stock in your equities portfolio can be detrimental to your financial health. Any change in the business cycle or external factors influencing your preferred sector may have a negative impact on your portfolio. Diversifying based on size (large cap, mid cap and small cap) and sectors is a viable strategy to maximize returns while minimizing risk. 

Systematic Investments - Staggered investments in the form of a SIP in a basket of stocks helps you to tide over the market ups and downs, making volatility your friend. Psychologically, investors find it easier and practical to invest a small amount monthly rather than a lump sum amount at some time in the future. This approach brings in the much-needed discipline to investments while reducing the overall cost of purchase through rupee cost averaging.   

Observe - Identifying the right stocks to invest in presents as a challenge for many. The simplest solution to this conundrum is to observe which products/services are likely to stay in demand given the growth stage of the economy. For instance, in a growing economy, like India, with a rise in per capita income of the middle-income group, demand for lifestyle goods is likely to increase. This creates huge investment opportunities in sectors bound to benefit from this explosive consumption growth.  Backing this observation with some research will help you to pick up well-rounded stocks. 

Don’ts 

Attachment - Investors tend to get emotionally attached to sectors/stocks. If a particular investment idea yielded good results in the past, investors tend to repeat it to produce the same results. Be on guard to ensure that your investments are guided by research and not be your emotions. 

Fear - The fear of loss is a major barrier to healthy investing. It inhibits investors from grabbing opportunities for wealth creation. Apart from the fear of loss, investors are also wary of market volatility. This mental barrier drives investors to opt for fixed income options like FDs. However, it is a known fact that FD alone is not sufficient to create wealth. If thorough research is conducted to pick up fundamentally strong stocks from a long-term perspective, there is no reason to fear loss or market volatility. 

Obsess - Once invested in equities, many retail investors obsess about the performance of their portfolio. They constantly monitor their stocks prices and get easily agitated by any negative market or economic development. This creates unnecessary panic leading to an avoidable sell decision. Every market goes through its phases of ups and downs. While it is advisable to periodically evaluate the portfolio, obsessing over it daily will not yield viable returns. Treat equity as an investment from a long-term horizon to avoid getting anxious by short-term results.  

Procrastinate - To make your money work for you, it is important that you take immediate action. A delay in starting the investment process impacts the corpus that you accumulate over a period of time. Take the example of Titan for instance. With India’s affinity for gold, Titan has been and continues to be a good pick for retail investors. Had you invested in Titan in Jan 2010 at a price of ~INR 75, it would have multiplied 13 times over a 9 year period, selling at ~INR 1,105 in March 2019. Had you delayed the same investment to Jan 2011, you would have bought one share of Titian at ~INR 171 and sold it at ~INR 1,105 in March 2019, multiplying your wealth by ~5 times . This difference will only widen when you multiply it by the number of stocks you invest in. It clearly shows that procrastination inhibits you from seizing the full potential of equity investments.

Overwhelmed- Number of variables and limited know-how on the part of investors often make equity investments seem like an overwhelming task. The investors prefer to stick to limited growth options as exploring equities feels intimidating. Instead of feeling bogged down, seek professional help to make the right decisions. At times we seek the opinion of a professional like a doctor or lawyer to take care of critical issues. Asking an investment specialist for help is no different. An experienced financial planner can guide you to improve your equity portfolio within the acceptable risk limit.