Strategizing Your Investment – Are Equities The Best Asset Class For This Decade ?
Are you doing stock market analysis & investing and still wondering whether you have chosen a right asset class?
With a rather disappointing start to the year in the stock market, and things looking to get even uglier ( Read here about what Nifty can fall up to), we are back at what we call the “Testing Phase of an Investor’s Journey”.
Not long ago in March 2020 we were probably at the same stage with similar questions in our mind–Should I exit or hold? Should I have diversified more? Did I choose the right stock? Am I doing the correct stock market analysis? Did I enter at the right price? Is there any other technique that I need to learn how to invest in share market and many more….
While these questions are staring hard at us, we must not forget what followed the slump in the market in 2020– a period of boom, which lasted pretty much till the end of last year. The benchmark indices SENSEX and NIFTY returned 22 per cent and 24 per cent respectively in 2021. Returns from certain categories of equity funds – large-cap, mid-cap, and flexi-cap – were even higher ranging between 30-50 per cent. Several tailwinds in the economy propelled markets to new highs and we saw a similar upsurge
in the number of retail investors (someone who buys and sells equity shares, commodity contracts, mutual funds, or exchange-traded funds through traditional or online brokerage firms or other types of investment accounts).
Looking at Stock Market Analysis data from 2015 to 2020, NIFTY posted a CAGR of 8% as the participation from the retail investors was limited.
However, if we analyze the last two years, the number of retail investors surged and this was reflected on NIFTY yearly growth of 23%. Last year itself, from March 2020 to November 2021, NIFTY posted a growth of whooping 83%.
If we talk of this rise of retail population in absolute numbers, at the beginning of September 2016,
there were 2.64 Cr. retail investors in India, which was approximately 2% of our Population. This number has risen at the compounded annual growth rate (CAGR) of 21.5% to 7.01 Cr at the end of September 2021, which is roughly 5.07 % of our population.
So there is a light at the end of every tunnel, however long it may appear to be. Market turmoil is sometimes the ultimate test of our patience and the current scenario reminds me of two famous quotes from Bill Gates and Warren Buffett.
“We always overestimate the change that will occur in the next two years and under estimate the change that will occur in the next ten”.
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
Just like in most aspects of our lives, in personal finance too, our behavior is often dictated by what is happening now. While it is normal to panic in the face of a new crisis, like the on-going geopolitical tension between Russia and Ukraine or the corona virus threat that we continue to face, we must never lose sight of our long-term strategy for wealth creation. These events do test our resilience but they also provide us with an opportunity to reflect back at our mistakes, learn from them and re-strategize for the future.
We all have read the famous proverb “Don’t put all your eggs in one basket” and from a personal finance perspective, there cannot be a better piece of advice than this old proverb. Spreading your investment across asset classes is a good strategy as it reduces risk and maximizes returns. However, as an investor you will need to do in-depth analysis of a sector before investing in it, like a good share market investor will either do his stock market analysis himself or consult someone who knows stock market analysis.
For individual investors, there are four major asset classes available to invest in:
1) Equity – This includes individual stocks, stock indices (e.g. NIFTY, SENSEX etc.), mutual funds (which invest in equity or equity related securities) and derivatives (which are instruments whose value is derived from underlying shares).
2) Fixed Income – These are the assets which give periodic interests (fixed or floating) to investors till the maturity of the instrument e.g. bank fixed deposits, government savings schemes, bonds, debentures etc.
3) Commodity – These are raw materials, which make products having economic value like gold, silver, crude oil, copper etc.
4) Real Estate – This asset class focuses on apartments, plots, industrial areas, villas, commercial buildings, etc. The tangibility of real estate investments is a crucial characteristic and makes it different from securities that exist only in virtual or dematerialized forms.
If your portfolio is spread across these four classes, your investment is considered balanced, as it reduces the risk and maximizes the possibility of returns. However, in order to get a complete perspective of how to diversify your investment one should look at how these asset classes have fared against each other in the last decade.
Looking at the above numbers, we can see that mutual funds (equity), real estate and stock market (Equity) have clearly beaten the rest of the Asset Classes. The inflation-adjusted returns of a saving account is negative and the returns from gold and term deposits (FD’s) can best be termed as negligible.
Investing in the mentioned asset classes requires expertise, time and financial awareness. Especially, in the case of equity investments, an investor can either learn how to invest in share market himself or use professional services of companies like Adwizon, Stock edge or Groww. At times, learning how to invest in share market oneself can be a tedious task and it may not give the desired results. Investing in share market requires in-depth stock market analysis, Fundamental analysis, technical analysis, derivative analysis are the various techniques for stock market analysis.
Acing these techniques along with your present business or jobs is not impossible but is not recommended.
While the main objective of investing in an asset is to get good returns, we should always factor in three important points while investing in any asset class– liquidity, transparency and risk-reward ratio.
Liquidity: Liquidity means how quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever you need it. One of the biggest advantages of financial assets over physical assets is their liquidity. For example, you can sell shares of companies or units of mutual funds on any business day, but the sale of property may take several months or years to materialize.
Transparency: Transparency is the extent to which investors have ready access to required financial information about the asset class. Often investors are unsure about what they are actually invested in, which makes it difficult to understand and evaluate the portfolio exposure. This is where the financial asset have an edge over the physical assets like real estate. Financial markets are regulated and asset prices are transparent but in absence of a regulated secondary market, physical assets lack transparency in prices.
Risk/Reward ratio: Risk/Reward Ratio is measured by investor for the level of risk taken on investment against the level of income and growth achieved on investment. The relationship between return and risk is fundamental in investments – higher the risk, higher the returns. Different asset classes have different risk profiles. Fixed income asset classes do come with the assurance of minimum risk but their returns would struggle to beat the inflation. Equity on the other hand has the highest risk but also the highest return potential among all asset classes as we saw in the Historical Performance of asset classes.
So considering all the above factors you can re-strategize your investment weighing in your investment horizon and the risk appetite. If your investment horizon is short and you are very risk averse, you can chose to park your money in fixed income assets. However, for individuals with a longer investment horizon and a better risk appetite, the best option would be to try to diversify your investment with maximum exposure in equities.
Equity in all likelihood would continue to be the most profitable asset class in this decade as well. While investing in Equities you must also try to diversify across various sectors and with the markets being discerning, you should stick to high-quality stocks and stay away from penny stocks and those with weak fundamentals.
During a correction mode, even high-quality stocks can experience a bumpy ride. However, with strong fundamentals they will eventually bounce back. Always, we need to keep in mind to recognize such good quality stocks, we require in-depth stock market analysis.
So keep faith and stay invested!!