Don’t let volatility scare you: Follow these 3 rules when investing in equities

Every now and then I like revisiting investment books, either to brush up my knowledge or build a latent understanding of the markets.

One such book is “One up the Wall Street” by Peter Lynch. In the book, he had coined a term which then set precedence for a multi-bagger stock, i.e. a “Ten-Bagger.”

A Ten-Bagger is used by investors to define an investment that appreciates to 10-times its initial purchase price. He thereon attributed his success to a small number of these stocks in his portfolio.

But, more than the science behind identifying such stocks, Lynch mentions the true test lies in building the discipline of hanging onto stocks even when they go through their own volatility cycles.

The trick: avoid clinging to arbitrary rules and no matter what the fluctuations, hold on to a stock on the basis of its own merit.

It is a very basic thought that when equity markets are doing well you want a piece of the pie.

However, being subject to volatility — one may be unsure about how much to put in. Therefore, when it comes to investing in equity, I often advocate sticking to these three rules.

> Do not be intimidated by the negativity splashes:

Whenever one starts investing in equity markets for the first one to three years, you will be bound to come across several periods of red or negative returns.

But, it is over a longer period of time, say seven to 10 years, do the equity returns turn decisively positive.

Hence, rather than panicking over an investment’s short-term movement, it is better to track its big-picture trajectory. Have confidence in an investment’s larger story and do not be swayed by short-term volatility.

> Stay in it for the long run:

One of the most important reasons that all financial advisors insist on is the identification of goals is because they help you know what instruments you should choose.

Over a longer period of time, say seven to 10 years, equity returns turn decisively positive. Hence, for goals which have time on their side, like – your retirement plan, your child’s college education fund and so on are best matched with equity.

> Most importantly – Stick to a strategy:

There are many ways to pick stocks and it is important to stick with a single viewpoint. While several people try and time the market, it can be a dangerous territory in the long run.

Not only will you make yourself more vulnerable to market volatility, but your portfolio also will not last in the long run.

Investing requires making informed decisions based on the things that are yet to happen. Past data can indicate things to come, but it is never guaranteed.

How do you boil down to a strategy ? Check the company’s fundamentals, and it is important to invest based on the future performance, as compared to the past performance.

Most importantly, as Peter Lynch puts it, “Invest in what you know, invest for the long run and do your homework.”

(The author is Head, Personal Wealth Advisory, Edelweiss)

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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