Investing into equities has never been that easy. Though we always wanted it to be! Especially when one has to manage one's money across cycles! For bulls and bears have always spelled confusing signals for the investors! For instance, those who entered equity markets in 2008 were quite disheartened with the fall and must be all busy booking profits today. And the ones who entered at Sensex levels of 3,200 way back in 2003 and exited at 3,800 levels with 20% returns must be whining over losing the big bull run thereafter.
This tells us that investment decisions made purely based on market movements is a futile exercise. Markets are unpredictable. And they will always remain so. While one may expect a bull run is round the corner, the markets may not be in a mood to oblige. Also, who knows the peak of a bull run? This implies the rise and the fall of the markets are not known. Not defined either! And there is no quick formula to get this right. So what should investors do?
First things first! It's important to note that it is not always about buying. But also selling! While brokers and investment advisors make it easier for the investors by telling what and when to buy, selling a stock is something not always been communicated. Or rather misunderstood! To begin with investors need to decide initially about how much money they want to put into equities. Secondly, investors should decide how much returns he wants. Next and very important is how much risk an investor can take? Certain amount of investments into debt markets is also advisable. Debt instruments entail lower risk and assure stable returns. Hence they work well for risk averse investors. And last but not the least, how long can he wait? Consider this case. An investor plans to fund his child's education in the next 15 years. He therefore needs to allocate higher money into equities. And be patient. And irrespective of the market movements, he needs to hold on. As his investments need to beat inflation in the long run. So that he makes up for the child's education expenses. But do remember, higher equity allocation means higher returns and also higher risks. So profit booking at times and switching to better stocks can make up for this. In this way, he'll be able to sail through market cycles.
While none of the investment approach is foolproof, investors may not always get it right. But the downside can be contained. Risks can be minimized. And the losses can be controlled.
We couldn't resist here to remind investors of the legend Warren Buffett. Mr. Buffett is a patient man. He would never chase prices or force any investment. A disciplinarian investor that he is. And that's what separates him from the majority of unsuccessful investors. In his words: "You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing."
What kind of investment approach do you adopt? Do you tend to change your approach with the change of season in the stock market? Share your views on the Equitymaster Club.