The best approach for a given investor will depend upon various factors such as their risk tolerance, time horizon and the amount of principal that can be invested. There are several ways to make a portfolio grow in value. Some take more time or have more risk than others, but the major factors include being patient with your investments & not to be greedy or in other words expectation of rational returns.
The primary objective would be to look out for quality businesses. It could typically be a new sector or segment which one expects could grow rapidly in the next few years or it could be a market leader in an existing segment with an excellent track record.
Buying and holding investments is perhaps the simplest strategy for achieving growth, and over time it can also be one of the most effective. One should look to buy shares not with the view od buying stocks but with a view of buying a share of the business. Those investors who simply buy stocks or other growth investments and keep them in their portfolios with only minor monitoring are often pleasantly surprised with the results. An investor who uses a buy-and-hold strategy is typically not concerned with short-term price movements and technical indicators.
For the average investor who does not have the time to watch the market on a daily basis, it may be better to avoid market timing and focus on accumulation strategies more geared for the long-term instead.
Diversify with the right combination of stocks, bonds and cash can allow a portfolio to grow with much less risk and volatility than a portfolio that is invested completely in stocks. Diversification works partly because when one asset class is performing poorly, another is usually doing well. As the saying goes, don’t put all your eggs in one basket. While debt investments may give you 7-8% returns, equity investments can provide you double digit returns. A judicious mix of both may still give you 10-12% returns.
Investors who want aggressive growth can look to high beta mid-cap and small-cap stocks to get above average returns in exchange for greater risk and volatility. Some of this risk can be offset with longer holding periods and careful investment selection.
Rupee-cost averaging also allows the investor to reap a greater gain from the investment over time. The real value of RCA is that investors don’t need to worry about buying at the top of the market or trying to carefully time their transactions. An investor will allocate a specific amount of money that is used to periodically purchase shares of one or more specific companies. In other words this would be like a SIP in stocks.
Equity markets returns are irregular and we may have up cycles & down cycles. But as seen from the chart below if held on for a period of time, returns are always positive trending. Currently the broader markets are significantly down & these are market cycles that we have to play out. We have seen historically that good quality stocks give handsome returns from such subdued levels when things turn around.
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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’