Today i was reading an Article in one of Business Magazine regarding recent Market Rally. The Stock Market touched all time high. As an investment class, equity investments does not yield great returns even in long term. Reason being very few stocks participated in recent rally. The highlight of recent rally is that retail investors were missing from market. There was no euphoria as we saw in 2008. Investors deserted the market after Global Financial Crisis in 2008. I saw this superb video on You Tube explaining Global Financial Crisis of 2008.
As a thumb rule, all the Financial Gurus suggest that % investment in Stock Market should be = (100 – Your Age). If your age is 25 years then % of equity investments in total investment portfolio should be 75% i.e. (100-25). As you grow older you should reduce exposure in equity investments. Sounds good but equity investments carry highest risk among all investment class. At young age, investment portfolio in terms of absolute value is smaller thus comparative risk is much higher. Assume in scenario A, total investment is 1 Lac and 75k is invested in equity. Whereas in scenario B total investment is 20 lacs and 15 Lacs is invested in equity. In absolute terms, the risk factor is high in Scenario A. Now if 75% is lost then in Scenario A person is left with 25 k but in Scenario B he is left with 5 Lac therefore stakes are high in Scenario A then in Scenario B. It proves that theory of high exposure at young age does not hold true as such.
Equity investments is not everyone’s (read anyone’s) cup of tea. None of the Financial Planners are ready to understand that Stock markets are driven by sentiments instead of fundamentals. It makes stock markets highly volatile. Entire wealth can be wiped off in a matter of some time. I bought shares of Reliance Communication at 750 in 2008 but they collapsed to under 100 this year. Can i take this risk again…Answer is NO.
As i understand, financial planners advise high exposure in equity investments at young age as the risk of heart attack is low at young age :) I am not kidding, seriously. In my opinion, young age is the age to build assets and corpus for future as retirement age these days is under 50 years. With collapsing economy, Bleak Job Scenario & Negative sentiments all around no one would like to add another risk in their life.
I am not saying that we should avoid equity investments but i suggest indirect exposure rather direct exposure in equity investments. As i suggested in my other posts also that index mutual funds are least risky as they closely track the market index like Nifty. Nifty comprises of top 50 actively traded stocks and fairly represented by all the sectors of economy (22 sectors of Indian Economy are covered in Nifty). Secondly, the weight age of each stock/sector is different which keeps changing from time to time. To keep nifty relevant to economy, the stocks are rotated as & when it is necessary. In layman terms, Nifty is fair representation of Indian Economy therefore it is well managed and least risky. Nifty Index Mutual Funds are best way to participate in Equity Investment Class. Stock Buying is like putting all eggs in one basket but Nifty index mutual fund is the best possible diversification you can achieve.
In terms of % contribution of equity investments in total investment portfolio, at any given point you should not invest more than 25% of total investment in equity investments. You can invest money in Nifty Index Mutual Funds in small tranches through SIP rather one shot investment. Last but not least, I would like to quote Warren Buffett “Buy when everyone else is selling and Sell when everyone else is Buying”. This should be Golden Rule for any investment. Though it is difficult to tune your investment but only smart moves can pay in long term.
Copyright © 2011-2013 Nitin Bhatia. All Rights Reserved.
Share this Post: