Dalal Street Investment Journal - July 09, 2019

DSIJ.in JULY 8 - 21, 2019 I DALAL STREET INVESTMENT JOURNAL (^77)
MF page - 11
Expert Speak

W

ealth creation is an important goal for every

investor. It requires investors to follow an

asset allocation model and a disciplined

investment approach to keep investments on

track through their defined time horizons.

Being a long-term goal, it tests the patience and perseverance of

investors through various challenges that they encounter from

time to time. These challenges emanate from the factors that

impact the stock market and the economy, as well as how

investors react to them.

At times, underestimating risks and/or overestimating returns

causes anxiety in the minds of the investors and they often feel

compelled to make haphazard decisions. And then, there are

those who do not plan for this very important goal in the

manner they ought to. In reality, one must have an investment

plan in place and the conviction to stick with it during periods

of market turbulence. By getting into the habit of planning and

following that plan, one can avoid making ad hoc decisions and

enhance one’s chances of creating wealth.

Similarly, understanding various risks associated with one’s

investment process is quite important. While most of us equate

risk with the potential of losing a part of our capital, there are

risks such as inflation that don’t allow our money to grow in

real terms. Besides, it would help to know that risk is an

inherent part of investing and that there is a direct co-relation

between risk and reward. The level and the type of risk would

depend on one’s time horizon, i.e. the length of time one has to

achieve one’s investment objectives.

For a short-term investor, volatility is a bigger risk than

inflation. Therefore, the focus should be on capital protection

through a portfolio consisting of interest bearing securities. On

the other hand, inflation is a far bigger risk for a long-term goal

like wealth creation. Therefore, for someone looking to create

wealth over time, the real rate of return i.e. return minus

inflation, becomes crucial in determining the level of success

that can be achieved.

Another important aspect of one’s wealth creation process is the

level of diversification in the portfolio. Diversification is

important because it not only reduces the risk in the portfolio,

but also allows it to perform in different market conditions.

Asset allocation is a form of diversification that reduces one’s

portfolio risk more than it compromises returns. When one

invests in two different asset classes that tend to go in opposite

directions in different market conditions, the combination is

likely to have a stabilizing effect on the portfolio.

Unfortunately, diversification is an aspect of portfolio building

where a number of investors often err. The common belief is

that more number of funds one invests in, the more diversified

the portfolio is. It is a myth that investors have been following

for years. In reality, in a portfolio that suffers from over-

diversification, the returns get diluted as non-performing funds

pull down the overall returns. Therefore, investors need to look

at diversification from the point of view of the portfolio of the

funds they are invested in and not from the point of view of

their own portfolio.

Time diversification, i.e. remaining invested over different

market cycles, is particularly important for long-term

investors. It helps in mitigating the risk that one may encounter

while entering or exiting a particular investment or category at

a bad time in the economic cycle. It has much more of an

impact on investments that have a high degree of volatility, such

as equity or equity-oriented funds. Longer time periods

smoothen those fluctuations.

Tax efficiency has to be an essential element of one’s investment

plan. While tax efficiency alone should not drive the investment

strategy, it can make a substantial difference to one’s wealth

creation process.

DS

Hemant Rustagi

Chief Executive Officer, Wiseinvest Advisors

Patience And

Perseverance Help

You Create Wealth