As equity investments are capital investments, casual investors face the risk of losing the amount of capital invested. So, one should have time to study the stock markets and gather experience by making small investments, before making big investments.
“The availability of a variety of investment options is unparalleled compared to even the recent past. Global markets are ready for trading at one’s fingertips. However, the millennial investor should be cognisant of the perils of information overload. It is easy to get sucked into FOMO (fear of missing out) trades, where they chase overvalued assets at higher and higher prices. So, it is vital to conduct due diligence on both the product and the credibility of the source,” said Viraj Nanda, CEO, Globalise.
To stay invested during market turmoils, an investor should enter the market with a clear objective and not just to make quick returns.
“More time should be spent to understand the product rather than looking at only expected gains. From a risk perspective, it is important for the investor to evaluate one’s financial position, discretionary income, long-term and short-term financial goals and the probability of permanent loss of capital before taking positions in risky assets. The risks should also be taken from an overall wealth or overall portfolio level. In other terms, individual risky assets should be evaluated in terms of their overall effect on one’s wealth. A 2 per cent position in a risky asset might not impact overall wealth, while a large position can have adverse impacts,” said Nanda.
To minimise the risk, one shouldn’t invest all the money in a single stock, but should build a diversified portfolio by investing in the stocks of different financially-strong companies involved in unrelated businesses. Mutual funds (MFs) provide ready-made diversified portfolios, benefits of which investors may enjoy by investing comparatively small amounts.
“The importance of diversification has to be emphasised at this point. The millennial investor should aim at building a portfolio that is diversified across the globe and asset classes. When investments are diversified, volatility in any section of the market is unlikely to have a major impact on the total portfolios. With these basic tenets of investment taken care of, the investor can really take control of his financial journey,” said Nanda.
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“Markets such as the US offer scores of investment opportunities both at the individual stock level and at exchange traded product level. There are also platforms that offer curated products and provide a guided approach to investment. The investor can leverage these multiple avenues. While it is essential to follow the daily goings-on in the market, it is more important to understand the historic perspective and invest for the long term,” he added.