It’s The Strategy That Matters

It’s The Strategy That Matters

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

The key requirements for creating wealth are to be a disciplined investor and follow a clearly defined investment strategy. Your investment strategy depends on your investment objectives, time horizon, financial situation and attitude towards risk. Here is what can help you create wealth through your investment portfolio. First and foremost, design your portfolio in line with your goals. Many investors aspire to earn healthy returns over time. However, many such investors are often reluctant in even taking normal risks associated with investments that have the potential to provide higher returns over the longer term.

Simply put, their actions often belie their aspirations. While taking some risk in line with your investment goals is essential, taking too much risk may turn your dreams into your worst nightmares. This is where an asset allocation strategy has a role to play. It helps because if one asset class is losing money, the other asset class may be earning for you. On the other hand, if a substantial part of your portfolio consists of securities belonging to a risky asset class like equity, the end result can deviate substantially from your expectations over the short to medium term.

Considering that asset allocation is the most important factor in determining the kind of returns you can get from your investments over time, it must be the mainstay of your investment strategy. Secondly, start investing early. One of the benefits of investing over the long term is the power of compounding. However, many investors fail to benefit from this powerful concept as they begin investing without a clear time horizon. Besides, long-term goals like children’s education and marriage as well as planning for retirement generally require a large corpus.

Many investors keep postponing the start of their investment process because they either get overwhelmed by the amount required for each of these goals or because of the feeling that they will not be able to achieve their goals with smaller sums of money that they can afford to invest. Remember, the real power of compounding comes with time. That’s why the earlier you start investing, the more your money can work for you. No matter how young you are, the sooner you begin investing, the better. Next, avoid hasty selling decisions. Many of us, who take so much care while investing, often act in haste when it comes to taking a decision to sell.

While equities are essentially a long-term investment option, different investors cut short the holding period for different reasons. Whatever the reason, it is important to follow a proper strategy to avoid taking decisions that are dictated by your emotions rather than your needs. Investors also often make the mistake of either holding on to funds for too long. That’s why one must do a thorough analysis before making a decision to sell. The track record of the funds under review must be carefully evaluated. To do that, the focus has to be on the long-term track record rather than short-term performance.

A long-term track record moderates the effects which unusually good or bad short-term performance can have on a fund’s track record. Besides, a long-term track record compensates for the effects of a fund manager’s particular investment style. Also, ensure continuity in the investment process. It is quite common to see investors treating investment as a one-off activity. In reality, investment is an ongoing process that requires you to follow a disciplined approach. This approach not only helps in putting aside a part of your income for future use but also allows you to benefit from ‘averaging’. Investors often panic during a falling market and get tempted to discontinue the SIP without realising that investments made during these periods will get them more units. Therefore, you need to carry on and reap the benefits in the long run.

 

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