Investing in equities: Do you want to invest in equities? Here’s how to make the right investment decisions

As ET Wealth wraps up its 10th anniversary, we present the compressed wisdom of this eventful journey. Here is a story about stock market investing.

Make the right investment choices

Equities can help build wealth over the long term. However, at this point, as the Sensex hit the 2008 peak, we’re more worried than excited. Our concern is that retail investors usually get the timing wrong and enter the market when everyone else has made money. For example, just before the markets peak in 2007-2008, there was a significant influx of retail investment into equity funds.

The fundamental difference between an active investor and a passive investor is how often he monitors or reviews his portfolio. While the passive investor dozes off after putting in money, the active investor constantly monitors his investment portfolio. He also keeps an eye on emerging opportunities in order to exploit profitable conditions.

Of course, the returns depend on when you went public. Investors who entered when the market was bullish with irrational exuberance in August 2007 got only 8.08% returns over the next seven years. This reinforces the argument that just holding stocks for the long term does not guarantee good returns. An equity investor should be prepared to record profits periodically and to change their portfolio to align with structural changes in the economy and capital markets. You need to fully exit stocks or at least take partial profits when valuations are stretched too far.

(Originally published August 25, 2014)

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