Wealth creation in the equity market rarely comes from dramatic bets. It comes from sensible plans carried out over many years. Investors who focus on IT Stocks often discover that the sector has rewarded patience through steady dividends and long periods of earnings growth. Those who occasionally check the Wipro Share Price will also notice stretches of consolidation, which test conviction. A clear plan helps you remain calm through both phases.
Start with Your Own Goals
Before choosing a company to invest in, define your purpose. Are you saving for the education of a child in 10 years, or do you want to create a retirement corpus in 20 years’ time? Do you want some kind of supplementary income? What you intend to achieve and the time taken to meet the goals will determine the risk and time you are prepared to take.
It is best to keep the time frame for goals less than three years in equities is unsafe as market trends are too volatile. If you have a longer time-frame, you can afford to take risks.
Create a Foundation First
Set aside some money as an emergency fund and also make sure that you have enough health and term insurance. Pay off credit card dues and other high-interest loans. Once you have created a proper foundation, start allocating the rest of the money considering your risk profile.
Within the overall mix, it is best to make diversified equity mutual funds or index funds as the mainstay. Then you can keep a small portion for individual stocks. That way you can take a position view on your favourite stocks without hurting the overall portfolio.
Decide on the Allocation to the Sector
The IT service sector is a good bet with its emphasis on cash generation and overseas sales, but it is best to avoid putting too much money in one sector as a whole as various companies in that sector can get hurt if there happens to be a correction in spending by clients.
The best way forward is to put a small amount in any one sector in which you are interested. It is always a good idea to have a limit to the extent of your exposure to one sector, for instance, 5% or 10%. If your position in one sector increases beyond that, sell some shares to balance it out. Most investors set profit targets in case of a bull run in one sector. However, the best time to sell some shares and buy others is when one sector is underweight vis-à-vis others.
Invest in Stages
It is always difficult to time the market. Staggered investments in a falling market or in phases help reduce the risk. The idea is to buy more shares when the stock price falls and fewer shares when the price rises. This method is called the dollar-cost averaging method. You need to keep a record of the dates, number of shares, and prices. It will also help you while computing your taxes, for instance, the short-term and long-term capital gains.
Look Beyond the Price
While considering what companies to invest in, look at their fundamentals: how their sales and profits have grown, what the operating margins and return on equity are, and if they pay any dividends to shareholders. Compare the fundamentals of companies in a given sector and also track those companies’ performance against their own past performance. Find out if a company has diversified clients, has credible management, and is ready to embrace change and innovation, so that it can be ahead of the curve when the need arises. Apart from fundamentals, it is important to look at valuation. A good company bought at a higher price will give mediocre returns. Always look at price-to-earnings ratios and compare them with the averages. When investors are extremely optimistic, stock prices tend to swell, and it is often a good time to avoid buying them.
Review Periodically
It is important to periodically review your investments and rebalance your portfolio. Set a target, say every six months or a year, to review the investments. Check if the reasons why you bought a stock still hold true. Have their operating margins and profits improved? Is there any reason to believe that the valuation seems to have gone up?
Do not check your portfolios on a daily basis. It only creates anxiety and makes you buy or sell when you should not. Fluctuations in the short-term are quite normal. They say a lot about the health of a company but very little about its long-term viability.
Handle Market Corrections
Markets do fluctuate, and there will be corrections. It is important to keep a cool head and not panic. Revisit the reasons why you had invested in the first place. If fundamentals still hold, add more money to the portfolio. If not, cut your losses. Do not invest in leveraged funds as you will be forced to sell during a downturn.
Do not get tempted by tips and hot stocks on social media but follow a sound investment plan. Also, try and reinvest your dividends to buy more shares of the companies you have invested in. Over a period of time, say a decade, they can help you substantially. It is not about being smarter but more consistent.
A Closing Note
A prudent investment plan will have clearly defined goals, a sound foundation, smart allocation, staggered investments in phases, and regular reviews. It will not make you a billionaire but help you achieve your goals without stress.
