If you want to be a great equity investor, you need to avoid these mistakes to help you achieve your goals and, in turn, maximize returns from this asset class.
1) Don’t be scared by short-term volatility
Stocks are a volatile asset class, especially in the short term. Instead of panicking and hitting the exit button, though, you need to stay committed.
If it comes out, it converts the theoretical losses to real ones. In March 2020, when the markets crashed, most investors got nervous and took the exit route.
However, the markets rallied spectacularly well and climbed to new highs in the following months. Those who showed enthusiasm during adversity were sitting on substantial gains.
Even in the past, stock markets have rewarded investors who have shown patience and discipline. Take a fundamental, valuation-based approach and look for opportunities in an expensive market.
2) Do not forget the reason for the investment
As an investor, your role is not to predict future results, but rather to build an all-weather portfolio that helps you achieve your goals, regardless of market conditions.
The purpose of investing in stocks, like others, is to let your money work for you. Therefore, you should always keep in mind the reason why you invest and know the objectives.
When you remember why you’re investing, you’re more likely to stay committed to it, despite short-term fluctuations and ups and downs.
3) Do not keep a concentrated portfolio
Conventional wisdom says don’t put all your eggs in one basket. This is also valid for actions. It should be optimally diversified into large-, mid-, and small-cap stocks, even within the stock portfolio.
While small caps can help lift returns, large caps provide stability during market downturns. At the same time, stock diversification can help you take advantage of the growth history of different sectors and companies.
4) Don’t avoid risk
You cannot avoid risk when investing. However, a prudent investor is one who takes calculated risks. To achieve his goals, he must analyze the current environment and take appropriate risks. For example, before you invest in stocks or mutual funds, dig deep to understand their fundamentals.
Consult the company’s strengths, balance sheet and corporate governance model before investing. Similarly, if you want to invest in a stock mutual fund, understand the investment model of the fund, the reputation of the AMC, the experience of the fund manager.
Taking calculated risks can help you take a more measured approach when building a stock portfolio.
the last word
Equities can be a rewarding asset class that can help you offset the effects of inflation.
Prudent investment in stocks can help you build a sizable body for long-term goals. Avoiding these pitfalls can add value to your capital investments and make them a winning proposition.
(The author is president and director of personal wealth at Edelweiss Wealth Management)