An Investor with Bull’s eye

An investment is a sacrifice of current money or other resources for future benefits. The sacrifice takes place now and is certain. The benefit is expected in the future and tends to be uncertain. The investment process consists of two tasks. The first task is security analysis which focuses on assessing the risk and return characteristics of the available stocks. The second task is portfolio selection which involves choosing the best possible portfolio from the set of feasible portfolios or stocks.

Investments in stock markets have become a passion and a disease which is spreading vigorously. The consequences of that investment may be a win or a loss. Fear & Greed – these 2 factors play a very important role in investment.

The stock market is very diverse with many unknown factors. For unforeseeable reasons the market may go up or down and this will have varying effects on different stocks. Some stocks may be directly proportional to the market conditions and some may be inversely proportional to the market. This is where the importance of portfolio diversification comes into picture as financial security plays a major role in investment and these are two different aspects which go hand in hand.

Every investor needs to try to make their customized portfolio match three main factors: time, risk and returns.

Time horizon: It is the time span that an investor plans to set for his target to be reached and the time frame for his investment. An investor must have a decent time frame looking at his personal details like age, purpose of investment, etc. But longer time duration is beneficial for an investor for better returns.

Risk appetite: A young blood has the potential to take riskier investable stocks than an old investor. One reason for this difference is their mentality, responsibility and age. The appetite of the risk is also important for an investor to set his time frame and targets.

Returns: An investor must not possess a mentality of getting higher returns in lesser time span. Every investor wants to make profit. But one must also be prepared for the worst case scenario. It is said that rather than making a heavy loss it is better to make a lesser loss and move on. This is called the stop loss of an investment or a stock.

It is presumed that an investor is aware of the fundamentals and basis regarding the stocks that he is planning to invest in. The fundamental analysis, in fact the in-depth information gathering gives a better investment strategy. Some basic principles in trading that govern the investment portfolio creation are:

Quality stocks with strong fundamentals:

Picking penny stock might be great for some side-line speculation but this might not be beneficial for combating the down-falls when market crashes and financial security comes in red zone.

Diversification:

It is a need and a vital key player for portfolio creation. “Do not put all your eggs in one basket”- Harry Markowitz. A diversified portfolio gives better returns and stronger ability to tackle uncertainties. However a wider diversification may lead to better monitoring and analysis. An optimal diversified portfolio depends completely on the investable amount, target, risk and return.

Entry and Exit Strategy:

There is no obligation of entry and exit in equity market by regulators and stock exchanges. Therefore one must have an entry and exit strategy. A new investor always gets a good return but even before digesting that return he tends to be greedy enough to make greater loss in his following investment.

Portfolio Expectations:

Building a portfolio should be made with long term goals. While it might be a fanciful idea to double the investment every year with some very high risk methodology this should not be the basis for an investor expected portfolio return. Setting a realistic target is a better way of building the portfolio for tomorrow and not for today.

The volatility of market is found to be due to the psychology and sentiments of investors, traders and speculators. A small gain or quick recovery of market may not be the bounce back in the market. In recent few months the indices of the stock exchanges of India (BSE and NSE) have fluctuated very rapidly. So, an investor must not get afraid of short term losses rather should concentrate on due diligence of their portfolio. It has been seen that the macro-economic factors as well as the micro-economic factors in one or the other way have made a huge impact on the stock market.

- By Abhijit Saha (Srishti School of Business), among the top 5 entries chosen for being published on the blog in the February edition of the article writing competition