Last Updated on March 6, 2025 at 9:08 pm
Each time the stock market falls, a new generation of investors learns how risky it can be, especially small cap and mid cap segments (which includes the Nifty Next 50). Equity investing is challenging for two reasons.
1) It requires incredible patience, discipline and conviction. See: Now Is the Best Time to Invest: Do not stop or redeem your equity investments! These qualities are rare in most individuals.
2) Superficially, it seems like a kind of a catch-22 situation. You don’t have enough money to stay with a fixed income and avoid equity. But if you choose equity, there are no guarantees it will provide returns.
The first part is more challenging to fix. Is it possible for life to teach a person patience, discipline and conviction if they are not born with it? Sometimes yes, and sometimes no!
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The second part can be handled by digging deeper. Investing in equity (as part of a balanced portfolio) offers a reasonable chance of beating inflation over the long term. Nothing more, nothing less. See: Why should I invest in equity mutual funds when there is no guarantee of returns?
A reasonable chance means the likelihood (qualitatively) of success is better than a coin toss if we stay invested for a long time (how long is hard to say; the minimum is 10Y, but preferably much longer).
You do not get such odds when you marry (that it will last) or go to college (that you will get a good job or a career, etc). We go through life with unknown odds and no guarantees of success, and we cannot take things for granted and must work on them daily. Equity investing is no different. Why should we seek special consideration from the stock market?!
Also, the market is not obligated to provide us with the return we seek. Inflation is a variable number, and so is equity return. As a country develops, inflation and equity and fixed-income returns will fall. So, our return expectations after tax should be taken into account. See: Equity may beat inflation, but that doesn’t mean you will!
So you must invest in equity, but you must do so after appreciating risks and recognising that there are no guarantees of success. This is hard for many to grasp. If you can appreciate it, then this is how you can be good at (equity) investing.
- Be clear about your goal.
- Choose a suitable asset allocation.
- Invest as per that asset allocation like a machine.
- Increase investments as much as possible.
- Learn how to manage risk in your portfolio in a goal-based manner.
- Rebalance your portfolio at least when the deviation in asset allocation is 5% or more.
- Systematically reduce equity exposure well before you need the money.
- Once you start, portfolio maintenance should take 30 minutes a year (yes, a year!).
The freefincal robo advisor tool creates a plan for you that considers all these factors.
These are the technical steps. If you can keep your emotions under check (reason one above), you can implement them. Else no.
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development.
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