- Date : 05/04/2019
- Read: 5 mins
This World Health Day, let's look at the different ways in which you can keep your investment portfolio healthy.
Recall the proverb “Health is wealth”? It was a folksy way of highlighting the importance of maintaining robust health to create substantial wealth. To ensure that one remains in good health, one has to invest in a balanced diet and regular exercise. Similarly to ensure that one’s financial portfolio remains healthy, one has to follow a few practices.
Here are nine ways to keep your portfolio healthy:
1. Invest and Trade in fundamentally strong stocks
One must seek to invest and trade in fundamentally strong stocks. If and when the market plunges, stocks which have weak fundamentals not only end up losing value substantially but also tend to take time to recover once markets turn favourable. Whereas prices of stocks with strong fundamentals recover faster and inevitably once the markets begin rising.
2. Stick to SIPs
When markets fall, retail investors tend to discontinue their SIPs. This is no less than a cardinal sin as they lose out on a vital benefit offered by mutual funds – rupee cost averaging. In fact, when markets fall, one must increase their SIPs.
3. Step up your SIP
Every year, one can expect their income to increase. Therefore, one must also step up their SIP investments by a corresponding percentage. For instance, if you are expecting that on an average your salary can increase by 8% every year, you can increase your SIP investments by 8% annually.
Here are some figures[S1] to show the huge difference that this can make over a longer term –
Case 1 – An individual invests Rs 10,000 every month in SIPs and achieves a CAGR of 15% over 10 years
The invested amount turns out to be Rs 12,00,000
The total corpus turns out to be Rs 27,86,573
Case 2 – An individual invests Rs 10,000 every month in SIPs and achieves a CAGR of 15% over 10 year.
However, this person steps up her SIP investments by 10% every year
In this case, the invested amount turns out to be Rs 17,40,000
And the total corpus turns out to be Rs 37,10,006
This is a massive difference of almost Rs 10 lakh over ten years. As one extrapolates the period to 2 or 3 decades, the difference turns out to be even bigger
4. Invest in what you know
Most common investors and traders, including the great Sir Isaac Newton, have always lost money in bubbles.
Over the last few years, one has witnessed a rise in alternative and exotic asset classes. These asset classes may be suitable investment avenues for HNI and UHNI individuals as they have access to the best research and professionals to make informed calls. However, a lay investor who ends up investing huge chunks in alternative asset classes may end up with substantial losses.
For instance, after galloping from less than $2000 in March 2017 the prices of Bitcoin reached $ 19,783 in December 2017 after which it has plunged to around $ 5000 as of April 2019. There were many who joined the journey after the price of Bitcoin was nearing its historical highs but ended up with glaring losses once the price fell.
5. Manage debt
Debt, if managed effectively, can be beneficial. However, one must pay off high-interest liabilities such as credit card or personal loans. Repaying longer-term loans such as home loans in advance also enables you to save significantly on interest.
Diversifying your assets enables you to diversify your risks. Invest appropriately in financial and physical assets. Within financial assets, spread out your investments across equity and debt according to your age and goals.
Equities and equity-based mutual funds can be relied upon to invest for long term goals. Funds that may be required within a short period of time could be invested in debt oriented mutual funds or fixed deposits.
7. Reviewing your portfolio
It is imperative to review one’s portfolio annually. By doing so, one can not only identify trends but also analyze whether the portfolio is still aligned with one’s life goals. One can figure out whether to include new entrants or weed out
8. Plan your exit
The philosophy of ‘buy and hold’ has become popular among long term investors over the last few years. However, certain businesses can be cyclical and stock prices reflect that sentiment. Also, companies may not offer promising returns forever. There may be phases when returns might plateau or even turn negative.
If your investments are goal bound, then it is prudent to make a smart exit once you are able to make handsome returns on your holdings. You may re-enter when prices correct.
9. Cut off losses
Often investors and traders end up suffering from ‘sunk cost’ fallacy. Rather than weeding out stocks which aren’t performing well, they end up holding on to such stocks. The belief that one must stick out till the end tends to be stronger than the conviction to cut losses. This emerges due to the feeling that one has invested substantial time, money and effort in purchasing these stocks and hence must wait till the stock price at least reaches break-even levels.
A common factor between successfully keeping one’s portfolio as well as oneself healthy is discipline. By being disciplined, an investor can grow her portfolio despite ups and downs in market conditions. Read this to know how to declutter your investment portfolio and make it more healthy.