Patience, diligence always pay dividends in stock investments

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

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

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

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

Investors are better off building a portfolio that has little or no overlap of assets, ideally withno or limited correlation. This helps to profit from the market vagaries which is a constantfeature. A portfolio always helps in participating various asset cycles and return profile whilereducing or mitigating the overall risk associated with the investment. Also, importantly, aportfolio 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 inreducing the risk of equity investment by staggered allocation to the asset while equallyparticipating in the profitability associated with this asset class. If one were to seekexcitement, then investing is not the place but could explore more speculation. Investingnot only requires diligence but loads of patience as markets would test investor's resolveduring downtrends.

To make wealth through equity investment, one needn't indulge in such short speculativetrades but identify good businesses and own them over long periods. Of course, one mustbe vigilant to management decisions while being aware of the business cycles. Equityinvestors should also hold the knack of distinguishing between these two to make informeddecisions. Overall, equity investment is a mix of science and art where identification of right businessand allocation form the former skill while the resolve to persist during the tough times fallsunder the latter form. When capital is limited, it's better to increase allocation over time asconviction builds over the business and their management.

(The author is a co-founder of Wealocty, a wealth management firm and could be reached at knk@wealocity.com)