June 12, 2020
Many of who are investors in Equity Portfolios and who have invested in equity (either through direct stock portfolio, equity mutual funds or ULIPs) would have been going through some tough times when checking their current equity portfolio values. Media had also played its part in fuelling the negativity among investors.
My intention in this article is to be pragmatic and practical about the whole stuff.
Equity investments are not for regular income, linear returns, liquidity and stability. For that, one should invested in PSU Bank Fixed Deposits or Savings Account. The core to investing in equities is returns, returns and returns.
Equity oriented investments are to give a kicker in one’s portfolio. They are volatile and can massively underperform stable investments in the shorter time frame and sometimes longer time frames such as these. However, over longer time frames (predominantly) they can massively outperform stable asset classes.
So that brings us to a million-dollar question, how much of our wealth should one invest in equity portfolios. There is no right answer but with my experience, the following points will help:
1. Invest that money which you do not require for a minimum of 5 years. After 1 year, ask this question again and take appropriate actions. Continue this process each year.
2. Invest that money which even if it goes down by 25-50% in the short term (like a year) does not give you sleepless nights and disturb your lifestyle. Such events may happen at regular intervals. We are reminded of March 2020 (30% fall) or subprime crisis in 2008-09 (60% fall).
3. Invest after you have enough balances for your emergencies and you do not have to depend on equity markets for your survival.
4. Invest ideally a minimum of 25% and a maximum of 50% of your financial wealth in equity portfolios. This will reduce the shock on your overall wealth during bad phases and help you to be patient with your equity investments.
5. Regular investing is a good way to reduce the risk of market timing. Invest more during the volatile phase to reduce acquisition costs.
6. The portfolio should have a low-cost bias as the higher cost can eat into returns over some time. Towards this end allocation to low-cost direct equity mutual funds and index funds would help.
7. 50% of one’s portfolio could be the core portfolio which gives domestic and international diversification. These should be held for longer time frames. Ideally, passive index funds tracking larger companies would be the most suitable.
8. The remaining 50% could be satellite portfolios consisting of direct stocks, active equity funds, international funds orthematic funds. These need to be exited as and when the target returns are achieved. These might have higher costs.
9. Allocation to equity portfolio through Unit Linked Insurance Plans (ULIPs) is perfectly avoidable for their non-transparency, illiquidity and higher costs.
10. Rebalance one’s portfolio ruthlessly or if target returns are achieved in some portions of the portfolio. Track your holdings once or maximum twice a year. You do not have to check their values daily. Tracking does not increase returns.
The current situation:
I have been often asked this question whether it is a good time to invest in equity-oriented portfolios now. My simple take is “Ask yourself will COVID-19 be with us after 5 years?” If the answer is a clear NO, then we are already late in investing. Equity portfolios are already up between 15% to 30% from March 23 when the equity markets hit their rock bottom recently.
For all those who are still waiting for things to be clear for starting your equity investing do note that “if you are late to the party and the music is loud enough…you probably will be washing vessels of your friends”. Join the party now.
To those pessimistic investors who had not so good an experience in the last 5 years with their equity investments including regular investments, I have only one thing to say. Hang on- The next 5 years will wash away the sins of the past 5 years. If possible, invest more now.
To those investors who had some bitter experience in debt mutual funds including Franklin Templeton winding up 6 of their debt mutual funds, do note there is no point in cribbing. Move on and keep investing in equity as per your overall allocation. Equity markets will reward your current pain. And FT will gradually pay most of the money.
Just to close- Equity portfolios will give you all the pain, torture and suffering in the short term. But wealth was never made easy.
Stay safe, follow social distancing but do not miss a once in a lifetime opportunity with COVID investing.
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Wishing you all a safe and exciting investment experience.
My personal (including my family) portfolio has a very large equity bias (more than 50%) to make the most of the current times. I also had a decent exposure in one of the FT wound up schemes.
1. Market linked investments like Mutual Funds and Equity share investments are subject to market risks. Kindly read the scheme information documents carefully before investing.
2. All other investments too have different levels of risk like credit risk, regulatory risk etc. I appreciate this before initiating any investments.
3. The past performance of any asset class is not an indicator of future performance.
4. It is very important to consult a Professional Planner/Investment Adviser while implementing any of the above ideas.
5. The above are mere suggestions and not Investment Advice as individual cases might differ.