Rule
No.1: Never lose money.
I was surfing the net
where I found this quotes its seems be funny but makes sense a lot in the
investment world …Making money is not that much easy in
stock market but not that much difficult it’s an interesting affair, but only if
we don’t lose some on the way. However, in all probability we may lose in some
case, causes can be various. Investing in equity requires skill, knowledge and
the courage to accept defeat at times.
It’s necessary to identify the companies you want to invest in, understand their nature and, if possible, discern their balance sheets. Now, all this does not require special degree or qualifications but a cursory glance will give you a broad picture. Another fact to remember you must monitor and review your portfolio every once in a while.
Diversification ……. What and How??
Division of investment
in different asset class is called diversification. In the world of investment
it’s the fact that diversification is only way to reduce the risk of the
portfolio. In diversification we can cover the loss of one sector with the
profit of other sector. Division of investment should be based on the
probability of return on that sector.
Now let’s understand how:-
Look at this simple
example Say, there are two companies where you want to invest X and Y. Both are
have a potential return of 15% and a standard deviation (a statistic which
measures the variability (i.e. risk) of the potential returns) of 25%. Also,
the returns of both these companies are uncorrelated i.e. the performance of
company X is dependent at all on the performance of X company Y.
Now assume you invest
equally in both these companies. Your weighted potential return (0.5*15%+0.5*15%)
will equal 15% this is the same return as that for the individual company.
However, due to the fact you have now spread deviation (i.e. risk) of your
portfolio will be 17.63% (lower than the 25% for each individual company).
It is important to
understand what this means.
You would have been
able to reduce the risk profile of the returns on your portfolio to 17.63% (from
25% for an individual company) without having to compromise on your returns,
merely by diversifying. So, by choosing two assets whose returns are not
correlated(this is important) like say stock X which is a Banking company and
Stock B which is a FMCG company, We can reduce our risk by keeping constant
returns.
Two things that are important to keep
in mind while planning your investment.
- Every asset has a risk attached to it. Yes it’s true that every asset has a risk attached to it and it’s also fact that higher the risk higher will be your return. Identify your risk apatite and start investing accordingly.
- Put your eggs in different basket. This Statement implies nothing but the diversification of the investment in different sector. It has been rightly said that “Never test the depth of the river with the both feet” in investment term we can understand this concept this as not to put all our money in one sector. It is better to identify the different sector on the basis of return and give the weight of your investment to those sectors accordingly.
To sum up this I would
like to express few more things on investment which is necessary to consider. There
are various sectors to invest like Stock (Banking, IT, FMCG, Manufacturing, Real-estate…etc),
Funds (Mutual fund), Property, and Commodity market (Gold and Silver…etc). Do
your own research identify the sector and invest your money to that sector
where you feel more return with less risk.
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