How to grow wealth in the long run by investing in the right options? MintGenie explains
Investors should set goals and segregate investments into long and short term portfolios. Long-term portfolio should have positive risk-adjusted return.
Over the long run, time is indeed an investor’s best friend as the compounding effects of wealth are best achieved through long-term holdings. Time is also a great friend in terms of riding entire lengths of investment super-cycles and not getting caught in attempting to dually time both, apt entries and exits. Per probabilistic laws, one typically ends up not being able to time both well and hence expected returns take a hit because of this. Hence, time in markets is something that is anticipated to deliver much more return than timing the markets.
Set your financial goals
Investors typically first need to chalk out their goals and financial aims in order to have a bird’s eye view of their investment plans. Once the goals are set, only then should the segregation be done in terms of long and short term. One could then follow a goals-based investing approach and form two portfolios for catering to the long and short term. The long-term portfolio ideally needs to have a positive expected risk-adjusted return comprising some weights for each asset class.
Typically the longer the horizon and the higher the required rates of return push investors towards more growth-oriented assets like equities, though this is frequently accompanied by higher volatility especially if the time horizon is not sufficiently long.
Plan strategic asset allocation
One more leg to strategic asset allocation apart from top-down construction is placing due importance on security selection at the bottom-up level. For this, a requisite amount of due diligence needs to be done by the investor to ascertain each security’s risk-return profile and whether or not it is in tandem with the investor's own risk appetite and capacity. A mingling of fundamentals and valuations-related parameters needs to be looked at to gauge the suitability of the security vs. investor capacity.
Once this strategic asset allocation has been thought through investors can then opportunistically set their sights on tactical asset allocations whose aim is to capture mispricings in the markets.
For instance, within the broad asset class of equities, a market correction might result in a steeper fall in mid-caps than large caps – consequently, an investor with the right risk profile i.e. capable of assuming more risk, could momentarily abandon strategic asset allocation between large and mid-caps (in equities asset class) and tilt more towards mid-caps to cash in on the apparently, more attractive valuations there. Once the observed mispricing plays out (hopefully, as expected), investors can then reverse the tactical allocations back to their strategic targets.
Implementing effective investment exit policies
Exit policies for cashing out on investments should also be ironed out as exit calls are typically more harder to implement than entries. Exits can either be due to stop loss-kind of triggers that curtail investment risk before it reaches bubble levels or they could also be if investments reach their desired original envisioned target valuations.
Net-net, thorough investment discipline and rigour are needed to grow wealth sustainably over the long run as processes should have precedence over results, though enough attention needs to simultaneously be placed on monitoring performance at intermittent time intervals.
Rajesh Cheruvu, MD and CIO, LGT Wealth India
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First Published:20 Dec 2023, 02:30 PM IST
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