Investing Like a Pro: Investing in Equity is the optimal investment strategy for combating inflation and ensuring investment success, but without proper portfolio management knowledge, it can be disastrous.
Equity investment can generate wealth, but average investors often earn lower returns than the market. A 2018 US study found that average investors underperformed the stock market, with an average return of 3.66% over 30 years, compared to 6.73% for the S&P 500.
Emotions often lead to underperformance in investments, as stock tips from friends or brokers can result in decisions based on short-term emotions rather than prudent long-term planning.
Key Investing Pitfalls and Best Practices to Follow
Portfolio Overload: Importance of Diversification
- Many investors imitate ‘guru’ investors’ success, leading to a large portfolio.
- Over time, this portfolio often underperforms compared to others.
- Diversification benefits from having more stocks, but it diminishes as the number of stocks increases.
- A balanced portfolio should have 15-20 stocks, with judicious allocation across industries.
- Overloading the portfolio with too many stocks risks missing out on significant market opportunities.
Reluctance to Sell at a Loss
- Identifying ‘junk’ stocks that need exiting is challenging due to emotional attachment and belief in a potential recovery.
- Stocks like Suzlon and Kingfisher have never recovered, causing portfolio damage.
- Failure to exit risks losing the opportunity to sell the losing stock and enter a winning one.
- Accepting mistakes and moving forward is advised, not sticking to them.
Market Timing and Exit Strategy
- Most investors believe they can time the market, but this is not consistently achieved.
- Time in the market is more important than timing the market.
- Missing top trading days can significantly reduce long-term returns.
- The best way to enter the market is staggered, not waiting for the market to fall.
- Disciplined investment at equal intervals without much attention to the market level can generate better returns.
- Even while selling, exiting in a staggered manner is always better.
Asset Allocation Importance
- Poor asset allocation can lead to portfolio performance not meeting expectations.
- Around 90% of portfolio returns are due to asset allocation.
- Asset allocation is likened to making a pizza dish, with each component contributing to the overall dish.
- Large-cap stocks can provide stability during market downturns, as seen in 2019 when they generated positive returns.
- Asset allocation involves dividing the investment portfolio among different asset classes, categories, and industries.
- Equity portfolios can be allocated into sectors like IT, FMCG, banking, etc.
Portfolio Rebalancing Importance
- Importance of asset allocation for improved investment experience.
- Rebalancing portfolio involves systematically bringing each weight to its allotted allocation.
- Empirical evidence supports performance advantage of rebalancing.
Common investors often fail to follow basic investing rules, resulting in lower returns. A disciplined approach to investing yields higher market returns. Lack of discipline may be due to occupation demands or other limitations, requiring collaboration with an expert research house.
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Equity investment can generate wealth, but average investors often earn lower returns than the market. A 2018 US study found that average investors underperformed the stock market, with an average return of 3.66% over 30 years, compared to 6.73% for the S&P 500.
Emotions often lead to underperformance in investments, as stock tips from friends or brokers can result in decisions based on short-term emotions rather than prudent long-term planning
Equity investment can generate wealth, but average investors often earn lower returns than the market. A 2018 US study found that average investors underperformed the stock market, with an average return of 3.66% over 30 years, compared to 6.73% for the S&P 500.
Emotions often lead to underperformance in investments, as stock tips from friends or brokers can result in decisions based on short-term emotions rather than prudent long-term planning