What role does Equity play in your Investment Plan?

The stock market is a gambling den. You never know when it is going to rise or worse drop like a stone. – Outsiders to the stock market

Here are some important FACTS for equity markets and equity investments (and risk related investments) which we must accept if we wish to invest and benefit from them:

1. It is never about timing the market but about the time spent IN the market that will give you returns from equity. (minimum investment period to get returns from sound equity investments is 5 to 7 years)

2. Returns from equity are NEVER linear and year-on-year. They will come in lumps, over a 5 to 7 year period.

3. ‘Shocks’ are part of the stock market and we must be ready to tide over this phase with prudent plans and actions

4. Patience and Discipline are a must to achieve success in equity investing

"If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes." & "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." - Warren Buffet

- Warren Buffet

Experience is key

Some investors clearly understand the markets so well and ride all the waves and storms and come out winners. Perhaps the only way to understand this is ‘experience’. And for this experience, we need to remain invested in the markets for a minimum period of 10 years It is tough for a new investor in equities to understand shocking corrections. But there is no short cut to experience. During this period, you will experience such ‘shocks’ too as we have seen over the past few decades. These shocks can be compared to the falls experienced when you learnt to bicycle as a child. Nobody can prepare you for the falls apart from either mentoring you or telling you to watch out for incoming traffic. But when you experience it, overcome it and the body learns to balance you progress from amateur to various degrees of expert level. Preparing yourself to get on in time onto a motorcycle. You learn more, the clutch action shocks you at first, then you get the hang of it. Investing in equity markets and riding shocks and storms can, in some way, be compared to this. There is no short cut.

And if we have invested in sound equity / balanced mutual funds, remember the fund houses also change their portfolios to manage such situations. No fund house works with a static portfolio. In difficult times they revise their portfolios, as required, by changing the holdings to ensure that when the upswing happens, they will be winners again. The same is seen in well-managed portfolio management schemes where good fund managers may have created cash weeks before an anticipated correction to take timely advantage of adding on or averaging down their prices on good stocks.