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Diversify Portfolio for Higher Returns

Take stock of your risk appetite and diversify across sectors in these conditions



Someone recently asked what it takes to be an equity investor. The question was not out of place considering the current market scenario. As the index has been hitting a low at regular intervals, the time has come to define the attributes required to be an equity investor. To simplify, just check out if you have these qualities to consider yourself a good stock market investor in these conditions.



Long-term thinking



Wealth creation is all about systematic approach and that automatically requires patience and discipline. While short-term investment strategies can prove profitable in the short term, it is the long-term planning which helps an investor in capital appreciation. As a result, one needs to look at equity as a long-term investment option and more importantly, an investor needs to stick to his long term approach. Not only will it bring in the much-needed focus but will also insulate the investor from short-term volatility.



For instance, an investor who has signed up for a 10-year SIP is unlikely be get disillusioned with the recent negative performance of the stock market simply because his goal is long-term. Having signed up for a long-term SIP, the investor is aware that he would stand to gain even from the short-term weakness.



Profit-booking



If choosing the right stock is a tough call, getting out of it is an even bigger challenge. As you would have noticed in the last couple of months, stocks which have been beaten down heavily are unlikely to regain their old levels in quick time. Investors, holding on to these stocks, are sure to dwell on the missed opportunity.



One of the fundamental guidelines of investing is to sell in rising markets particularly if your stock has galloped in quick time without fundamental backing. While profit-booking at regular intervals in line with goals is a safe strategy, it may not work at all times. Hence, investors need to arrive at a combination of fundamental goal setting and fair valuation to resort to profit booking and the task gets easier when an investor acquires the habit of regular review of portfolio.



Diversified basket



If returns guide the principles of equity investing in early stages for investors, it is the asset allocation which takes precedence at a later date. History has shown that wealth creation is all about diversification through asset allocation, and within equity, you will have to acquire the habit of diversification between sectors and themes.



Take the case of exposure to mid-cap or large-cap. While large-cap stocks assure liquidity and stability, the potential of superlative returns are offered only by mid and small companies, but carry plenty of risk. Hence, an investor has to choose his portfolio with a good mix of both, according to his risk appetite and tenure of investment.



Investment as risk capital



The thumb rule for equity investments is that an investor should be prepared to forego the funds allocated for it. In reality, however, investors constantly end up comparing the portfolio value with their original capital deployed and don't have the stomach for writing off losses. As a result, investors without staying power end up investing in equity and are forced to cut down their exposure due to lack of risk appetite.



As an investor, look at your allocation for equity as a fund to be foregone in the short term and this will help you tide over the volatility. In fact, recent events such as intermittent falls, truly enables the investor to understand the risks associated with stocks. In the long run, this will also help in better understanding of the nuances of stock picking and risks associated with equity investing.

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