- Date : 11/01/2021
- Read: 4 mins
New year sets you thinking about new beginnings, no matter what story your past tells you. 2020 was an excellent lesson for those investors who are struggling to start fresh and start strong in the stock markets. Despite crashes bigger than 20 percentage points, exchanges across the globe won back the confidence of investors relatively fast. If there is a lesson to be learned here, it is that markets make comebacks in the long run.
An anecdote on risk
Ever wondered as to when the Sensex index was born? It was in 1979. Since then, we have come a long way, and markets have gone through numerous cycles of growth and disruptions. However, when you look at the yearly performance of Sensex since inception, what you see is one critical insight into stock markets in general - increasing the length of your investment period reduces the overall risk to your investments. If you stay put for over 15 years, the equity market demonstrates a near-zero probability of loss to your investments. It is no wonder that long-term investors who showed confidence have been rewarded well.
This new year is a perfect opportunity to distill your learnings from a historically significant year in the stock markets, and to build a killer portfolio to make a comeback in the stock market. Here are four mantras that will help you along the way.
Lay the foundations with index funds
Index funds can help you orient your new portfolio towards growth stocks. Moreover, index funds should constitute a sizable chunk of your portfolio as they expose your money to large-cap companies, thereby helping you mitigate risk arising from other instruments. The growth of Sensex over a period of 41 long years is a testament to the success of strong index funds in long-term investments.
However, large cap stocks can also bring the much needed stability, or better yet, the foundation on which you can build a lively portfolio that performs. Some large-cap stocks correlate with the movement of an index in the long run - these are ideal candidates for building stability in your portfolio. But it is also worth noting, that index funds build a resilient diversification strategy into your portfolio from the onset.
Large-cap growth stocks
Growth stocks, by their very definition, are usually small-cap stocks, and they tend to outperform the market through innovative business models and products/services. However, some large-cap companies also exhibit a track record of outperforming the markets in the long run. These stocks bring stability and speedy growth to your portfolio.
If you spot a large-cap growth stock which also pays out dividends, opt for a dividend reinvestment plan - this will help you reinvest your dividend earnings and maximize your earnings in the long run by leveraging the power of compounding.
Opportunistic potential of the equity market
In the equity market, timing is a critical factor in making the most out of trades. 2020 showed a number of opportunities for buying low and selling high. A dynamic and fast market recovery showed a number of new opportunities for short-term investors and traders. High daily gains on index funds and IT stocks during mid 2020 and during the third quarter is an excellent example here.
While not all investors might be savvy enough to capture every opportunity right, keeping a sum of money aside to capture such opportunities can help achieve solid short-term boosts to your finances. Keep an eye on the upcoming IPOs, as they provide an excellent opportunity to exit with short-term gains as well as with long-term growth.
Balance growth stocks with value stocks
While growth stocks are anticipated to perform in the near term, value stocks help your portfolio score higher by leveraging stocks that sell at a discounted price when put in perspective with their performance. These stocks are usually high on dividend earnings while exhibiting a P/E ratio that is well below the market average.
These stocks usually belong to companies that are facing a legal or PR issue, or other short-term challenges. While some exchanges allow investors to give their portfolio an exposure to value stocks through specific exchange traded funds (ETFs). A portfolio that is heavy on growth stocks should be balanced with value stocks to make it ready for performing in the coming year.
While these strategies will help you craft a solid portfolio to re-enter the markets and start fresh in the stock markets, the first step towards a new financial journey that defines the future of your financial life can be a daunting task. But ultimately, all new journeys begin with a courageous and thoughtful step towards the light, driven by a mindset that weighs situations with the right perspective.
Don’t let the temporary and short-lived setbacks of markets in 2020 hold you back from the immense potential of equity markets. This new year, give your financial life a new start, with Angel Broking - open a free demat account, and start giving your financial resolutions a new shape, by leveraging the power of growth with equity markets.
And don’t forget to check out Angel Broking’s top picks in the stock market for this new year - our gift to you for starting the year with a #smartsauda, that will lay the foundation of long-term prosperity, and help you get your finances geared up for the coming year. Here is us wishing you a happy new year!