How to build wealth from equities? Some pointers!

By BankBazaar.com | May 12, 2010

Once you develop an investment plan you have got to stick to it. Asset classes, especially equities can move wildly based on political, global and other news. Having discipline while investing will benefit. It also means staying away from a potential investment when the risk / reward are unfavorable. It is the deciding factor between the investor’s success or failure to reach his or her goals.

Turmoil in the current economic environment raises several questions in the minds of investors- Should I exit out of equities? Gold has rallied significantly; maybe that is where I should invest in. With interest rates likely to go up, should I invest in bonds? These and many more questions like these have troubled the retail investor. What should he do? They say simple things in life are the most difficult to practice and it is the same. Predicting economic parameters like interest rates, inflation or GDP growth among other factors is never easy.  Like life, these are also unpredictable.  However, one can definitely have an investment plan such one can have a good night sleep in present without having to worry about the future.

Diversify: The first and most important rule is to diversify your investments across asset class. One must not put all the eggs in one basket.  A certain percentage should be invested in a variety of assets, such as large-cap or large, mid-cap and small-cap stocks. Put a percentage in real estate, gold and fixed instruments.  And yes do hold some part in cash too. Though the risk arising from economic factors would remain, the unsystematic risk, which is unique to the asset class, would be reduced. The principle of diversification involves investing across options so that losses in some will offset gains in others, thereby reducing the variability of return. It is a risk management technique. The rationale behind this technique is to yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Dollar Cost Average: In other words, this is known as systematic investment plan. This is a very useful tool especially in volatile times. By buying an equal amount each period, one can end up with a cost basis that is close to the average over that period. It is a plan which can offer a disciplined, systematic approach to investing that could be the cornerstone of your long-term planning. As seen from the table, SIP investing does benefit in the long run.

A’s investment through SIP B’s investment in Lump sum
Month NAV* Amount Unit Amount Units
Jan-07 9.345 1000 107.0091 12000 1284.11
Feb-07 9.399 1000 106.3943
Mar-07 8.123 1000 123.1072
Apr-07 8.750 1000 114.2857
May-07 8.012 1000 124.8128
Jun-07 8.925 1000 112.0448
Jul-07 9.102 1000 109.866
Aug-07 8.310 1000 120.3369
Sep-07 7.568 1000 132.1353
Oct-07 6.462 1000 154.7509
Nov-07 6.931 1000 144.2793
Dec-07 7.600 1000 131.5789
Total 12000 1480.601 12000 1284.11

NAV as on the 10th of every month. These are assumed NAV in a volatile market of a hypothetical scheme

Discipline: Once you develop an investment plan you have got to stick to it. Asset classes, especially equities can move wildly based on political, global and other news. Having discipline while investing will benefit. It also means staying away from a potential investment when the risk / reward are unfavorable. It is the deciding factor between the investor’s success or failure to reach his or her goals.

The last d is – don’t panic- Investing is not a difficult process. By following the above rules, one can definitely retire rich. Keeping one’s goal and needs in mind, one should carefully select the investment plan and have the discipline. Let fear and greed not rule one’s mind.

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