Patience, diligence always pay dividends in stock investments

Fear of missing out (FOMO) is a clear and persistent issue with investors. This drives many to make irrational decisions and act impulsively. This happens especially at times when markets witness a heightened volatility or asset inflation. The desire to participate in a fad encourages investors to take undue risks and thus deviate from their ideal path. It's critical to identify and persist with quality businesses.

Many times, investing is actually a boring and mundane process; thus, it helps to stick to a worn-out path than to turn adventurous. A study few years back in the US found out that best of the returns was experienced in the accounts where the owners who forgot about their investments or weren't alive. It doesn't mean that one can't experience wealth in their lifetimes, but the time given to the investments. More importantly, the itch to react to the market movements puts investors at risk than gain.

Also, investors try to cash on an evolving trend, while it could be profitable to ride on a trend or sector with tailwinds, it's important that to acknowledge that it remains so for a few days only and could get stuck if entered at a wrong instance. Peter Lynch, the legendary fund manager once said about timing the market: "far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves". So, it's important to give time for an investment.

One must appreciate that in the formula for compound interest, the power lies in the time than the quantum of returns itself. This makes for time spent in the market being crucial than timing the market. This is also the reason why investing through a systematic investment plan (SIP) has benefitted investors immensely as the rupee cost of averaging is achieved through this route. Also, the discipline helps the investor to tide over uncomfortable periods of volatility and tough market periods.

Investors are better off building a portfolio that has little or no overlap of assets, ideally with no or limited correlation. This helps to profit from the market vagaries which is a constant feature. A portfolio always helps in participating various asset cycles and return profile while reducing or mitigating the overall risk associated with the investment. Also, importantly, a portfolio is a better tool in providing much needed diversification for the investor.

Simple and rudimentary strategies like SIP, systematic transfer plan (STP) play a great role in reducing the risk of equity investment by staggered allocation to the asset while equally participating in the profitability associated with this asset class. If one were to seek excitement, then investing is not the place but could explore more speculation. Investing not only requires diligence but loads of patience as markets would test investor's resolve during downtrends.

To make wealth through equity investment, one needn't indulge in such short speculative trades but identify good businesses and own them over long periods. Of course, one must be vigilant to management decisions while being aware of the business cycles. Equity investors should also hold the knack of distinguishing between these two to make informed decisions.

Overall, equity investment is a mix of science and art where identification of right business and allocation form the former skill while the resolve to persist during the tough times falls under the latter form. When capital is limited, it's better to increase allocation over time as conviction builds over the business and their management.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached

at [email protected])