Managing Your Equity Portfolio
9/26/2011 4:38 PM Monday
One of the more compelling reasons for investing in equities is their ability, as an asset class, to provide positive real rate of returns over the longer term. However, the level of success that you may achieve as an investor, would depend upon your ability to select stocks, as well as well as to monitor their progress over time. As stock prices move in anticipation of future events as well as to reflect the current events, considerable research has to be carried out in to forecast the performance of the economy, industries and companies. If you are not adequately familiar with this process, it can be quite a daunting task.
No wonder then, investing in equities is one thing and getting the best out of them is quite another. Many investors get swayed and take the plunge as the markets rise. It is amazing to see how investors’ mindsets change with the index levels. The same investors who abandon equities during a downturn, rush to buy as soon as the markets start doing well. In both these situations, their decisions are triggered by either panic or greed, and not by a sound investment strategy. Needless to say, the results are often disastrous.
Then, there are investors who believe that ‘timing the market’ is the best strategy. While most of us have heard the cliché, ‘buy low and sell high’, it is actually very difficult to predict the right time to sell or buy. As it stands, stock markets seem pretty mysterious to many investors, and they are often unsure about what to do in different market conditions. While there is no ‘sure-shot’ investment strategy, it does help to go for continuity in the investment process, rather than to time the market. Continuity in the investment process takes care of most of the imperfections of the market place.
One of the strategies which can ensure that you remain invested in equities at all times, is to rebalance your portfolio from time to time. Portfolio rebalancing is a process of bringing different asset classes back into a proper relation-ship, following a significant move in one or more of them. This is different from the ‘averaging’ that most investors do in panic. In other words, re-balancing, either up or down, is a necessary exercise for long-term success.
Asset allocation is another strategy that allows you to tackle extreme movements in stock markets. An important feature of an asset allocation strategy is that it should not be dependent only on how different asset classes tend to behave, but also on how you, as an investor, tend to behave. An asset allocation strategy allows you to build a portfolio that has the ability to match your investment temperament.
Remember, if you allocate conservatively, you may receive lower returns than theoretically possible. However, the worst thing to do is to allocate aggressively to equities in a rising market, and then move out completely when the market goes down. Unfortunately, many investors do exactly this, and ‘capitulate’ near the bottom of the market downturn. The result of this can be much worse than investing conservatively and sticking with it. Therefore, as an investor, you must focus on what you need, and not on what you want.
Mutual funds can be an ideal way of investing in equities, especially for those who don’t have the wherewithal and expertise to invest directly. Besides, investing for the long-term helps investors reap the benefits of the expertise of professional fund managers, as investments are likely to appreciate steadily over time, overcoming most temporary setbacks.
Undoubtedly, investing in a tough investment environment, like the current one, can be quite a challenge. That’s why you must determine and maintain the right level of risk tolerance while building your portfolio. Another important aspect of this process is to develop a plan and have the discipline to stick to that plan. This ensures that every investment decision of yours is a well thought out one, and not based on some immediate urge.
Find More Articles on: DSIJ Magazine, In Focus, Personal Finance, Mutual Funds