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Raghvendra Nath, Managing Director – Ladderup Wealth Management
Investing in the equity markets can be an extremely volatile affair, testing an investor’s behavioural discipline, and rewarding those who are tenacious and willing to play the waiting game. As the legendary investor Warren Buffet surmised, the stock market is a device to transfer money from the impatient to the patient, warranting a long-term and balanced approach when investing in equity. In the current macro environment where inflation and geopolitical tensions are rife, this is even more important and necessitates that investors tide over short-term volatility by placing long-term bets on companies available at attractive valuations.
Moreover, just like achieving a balance between mental and physical health is important to leading a happy life, building a balanced equity portfolio is vital for achieving optimum financial health and long-term wealth creation.
When investing in equity markets, the primary aspect that every investor must contend with first is determining his/her risk profile. Thereafter, once the short- and long-term financial goals are ascertained, it is important to create a balanced portfolio involving both equity and debt instruments. While equities offer the potential of inflation-beating returns, debt exposure is equally important as it provides the necessary safety and liquidity for any emergencies. By understanding one’s risk profile and by evaluating one’s future financial goals, an asset allocation strategy can then be determined and committed to for the long term. This involves selecting from either large-, mid-, or small-cap stocks and allocating capital proportionately to balance between the reward potential and risk assumed.
That being said, a balanced portfolio necessitates exploring opportunities within each asset class. This is especially true for equities. Within equities, one has the option of investing in large-, mid-, and small-cap companies, while further diversification is possible by opting for differentiated strategies.
Generally speaking, large-cap stocks are considered to be relatively stable as they are usually market leaders and have a large and matured investor base, making them less susceptible to market volatility. Mid- and small-cap stocks on the other hand are companies that have high growth potential but are often more volatile and more prone to be adversely impacted by events such as the COVID-19 pandemic or the current Russia-Ukraine crisis. For investors who cherish long-term returns without assuming too much risk, it is recommended to allocate more capital towards large-cap equities, while balancing it with smaller investments in high-grade mid- and small-cap companies. Further diversification and balances can also be explored by opting for differentiated equity investment strategies. For example, investors with a moderate risk profile can opt for an arbitrage fund while those with a higher risk profile can invest in sectoral funds.
When investing in the equity markets, it is important to stay abreast of current trends and evaluate one’s portfolio periodically. Churning equities or changing asset allocation should be done after careful evaluation, to achieve the perfect balance for long-term wealth creation. Investing time in being updated can pay rich dividends in the long run and as summarized by Benjamin Franklin, an investment in knowledge pays the best interest.
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Views expressed above are the author’s own.
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