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Managing long-term savings to create wealth

Dhirendra Kumar

You're watching the evening news and you learn that the Sensex has dropped 350 points. Do you call your broker and sell your equity investments, or check out the next morning's newspaper to see what you might buy, or wait for the dust to settle?

Your answer may depend on many factors, in part, on your risk tolerance and the time horizon of investment. Volatility makes you nervous, but you may be having too much of your savings invested in equity. This is particularly likely if you have not re-balanced the asset allocation (how much money is invested in each stock as a percentage of your portfolio) in your portfolio for few years or got used to equity investments for short-term goals.

Time and again research proves that equities is the best weapon to combat inflation and the most rewarding asset class. Hence, when investing for long-term objectives like retirement, you should probably allocate a large chunk of assets to stocks for the growth they can provide over time. But the sharp gains and fall in value of your equity investment in stocks or equity funds makes you nervous. This guideline is to help you navigate in today's turbulent market and keep your stock allocations intact.

Things look bright

After many years of uncertainty we have a somewhat stable government and strong consumer confidence, inflation is low interest rates have come down, Indian companies are become more competitive by the day, the technology sector has emerged from nowhere and sustains its roaring performance given its key global competitive advantages. Yes, tech stocks do look expensive but their growth story prevails with significant potential.

That's the way it is

Equity prices by their very nature go up and down, and that has intensified in recent times. But the market weakness can realign stock prices with expected earnings which creates useful buying opportunity.

Keep a defined and documented sell strategy

Many mutual fund managers set targets for selling stocks they own. This is usually the point where a stock has less growth potential than when you bought it. When selling to restore a portfolio to your core allocations, you might sell a certain percentage from several equity investments. However, this will lead to capital gains tax liability on your profits or higher short-term taxes if investments are sold before one year.

Consider defensive equity options

Some sectors are more vulnerable in a volatile market. For example, quality consumer companies generally have a steady and rising revenue sales and profits than a chemical or an engineering company. Pharmaceutical companies are virtually insulated from the state of the economy compared to a cement or a construction company, and can hold up well in shaky markets. Other defensive investments include stocks of companies that pay high dividends and have a reasonable dividend paying track record. If you invest in stocks through a mutual fund, consider a truly diversified stock fund as your core holding. Though such funds are in minority today, there are few which maintain a well-diversified portfolio on an ongoing basis.

A systematic investment plan helps

For any investment, whether it be a regular saving or one time lump sum, you can significantly cut your risk by investing a fixed amount at regular intervals (Systematic investment planning is to invest money at regular intervals). This can help you buy more shares when prices are low and fewer shares when prices are high - a comforting strategy in today's volatile markets.

Reduce sizeable exposure to individual stocks

If you own a lot of stock in one company for historic reason, perhaps an investment you stuck around with for many years, which has turned valuable, make sure your other investments are well diversified. Within the equity part of your portfolio, consider a well-diversified fund. If you are conservative, you might boost investments in corporate bonds. If you own stocks besides mutual funds, you'll feel market fluctuations more deeply. Some of these stocks may be good 'sell' candidates if you are re-balancing a portfolio. You could also consider trading some shares for units in a mutual fund representing the same industry sector or investment objective.

Sharp falls are followed by gains as well and vice versa

Don't jump the ship because of Friday's dramatic fall. Sharp gains or losses in stock prices happen when you least expect them. And the only way to benefit is to deploy your long-term saving into equities all the time and re-align it periodically to suit your temperament and financial goals.

Source: Value Research

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