There is a lot being said about the fall in net inflows to equity mutual funds in the month of June. There are also reports which suggest that while individual investors are redeeming their mutual funds, many have increased their exposure to direct equity. It begs the question about whether both these are wise choices for investors to make.
What would a smart investor do?
1. Avoid timing and trading
Buying equity stocks for long term investing can help you create wealth; however, you have to be careful about short term opportunistic trading in the market. The risk in trading or opportunistic investments in stocks is that the short-term trend can change just as fast leaving you in the lurch. In the market meltdown this March, there was a day when the Benchmark index fell around 10% in a single day.
This kind of volatility is more or less expected in equity markets but it can’t be predicted. There are multiple factors which influence the daily change in stock prices. This daily change has little to do with the underlying fundamentals of the company which the stock represents.
Unless you have the ability to stomach this kind of volatility and take the risk of losing your capital, its best to avoid trading and timing. No one knows where the market will open or end tomorrow. Moreover, trading in the market is a full-time job as you have to be quick at executing the transaction. Avoid it if you can’t dedicate that time.
Smart investors aren’t overconfident about the one choice which they feel will make them the most return. This can be the choice of asset class or a security within that. Even businesses tend to diversify their product portfolio with size.
Diversification ensures that you have spread your money adequately across more than one asset and security so that in periods when one is lagging, the other is doing well and in bad times portfolio losses are manageable. Ideally, have a mix of fixed income and equity assets spread across a few products. Some of the products will cater to stable returns needed in the next few weeks or months and others will work towards creating long term wealth.
A balanced portfolio enhances the overall return and is less volatile than taking extreme positions in one type of asset.
Unless you have the ability to stomach this kind of volatility and take the risk of losing your capital, its best to avoid trading and timing.
3. Get advice
Smart investors don’t shy away from professional advice. This has to be distinguished from the occasional tips and suggestions from your friends and family. That is not professional advice. Seek help from a qualified market professional in making your portfolio relevant to your goals. Unless that happens, you will always be either surprised or underwhelmed by your portfolio returns.
Using help to align your portfolio with your goals and expectations also keeps you away from the lure of simply chasing return no matter what the risk is. Good advice will help you to not only create the right portfolio but also to avoid the daily noise and remain focused on your goals.