Follow these 7 investing principles for wealth creation

We cannot predict how far market valuations will be supported, but these investing principles will help you navigate uncertainties and volatility

January 27, 2021 / 01:45 PM IST

The market has rallied beyond your expectations and views and you’re feeling left out? At these levels, markets do feel almost scary, perhaps forcing you into a dilemma.

If you’ve moved on from denial to acceptance of the new reality, what information can you consider for your investing decisions?

Understanding the financial environment:

1) Weaker US Dollar supports Emerging Markets and other assets (like Gold)

--Driven by US fiscal deficit (2020 estimate: 16-17 percent of GDP versus 4.7 percent in 2019), US trade deficit, US current account deficit (-3.50 percent).

--Unlike equity markets, movements in major currencies are a lot steadier and more structural (unless it’s a response to a major event) and therefore, could play out over several years.

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2) Low-interest rates have now reached Emerging Markets

--This positively impacts borrowers, enables governments to carry higher debt and invest in public spending, investors are driven to equities for better returns.

--Increases affordability for households to consume and to acquire assets like residential real estate

3) Low-interest rates plus increased liquidity

--Propel valuations
--Empower corporates to raise capital and fix balance sheets (note the recent IPO frenzy, equity dilutions by banks/corporates).
--Historically post tax-interest rate yields (SBI 1 year fixed deposit at 5 percent) compel households to seek alternative asset classes (note: growth in new demat accounts).
--Globally, household savings aided by large-sized government stimulus (US households have received $1 trillion credit in their accounts) are driving consumption (led by FMCG and now spread to durables, automobiles…) and flows to markets.

--FDI is now a significant source of capital for India. Cumulative net FDI now exceeds cumulative net FII investments. Greater FDI = equity dilution/ deleveraging + larger PE exits through IPOs.

4) Businesses have become efficient (by cutting costs/ enhancing productivity):

--Margins are nearing all-time highs.

--Digital adoption has contributed to increase in productivity.

5) Demand is roaring back across sectors: read head-lines on auto, FMCG, Pharma, IT, residential real estate

Your investing principles

We cannot predict how far market valuations will be supported – like we did not know where the bottom was, we do not know where markets will make their peak.

However, we can frame our investing principles to navigate uncertainties and volatility. Here are suggestions to help form your rules:

1) Be a skeptic, not a disbeliever: Markets can be euphoric and pessimistic, but they also carry wisdom.

2) Do not form opinions of the future based on yardsticks of the past: Use historical data like valuation benchmarks as an important reference point but not as a deciding factor. It’s not a rule that past will repeat – market dislocations are usually caused by completely un-forecasted and seemingly improbable events.

3) How not to lose money as (or more) important than making money: Lock in profits at regular intervals.

4) Do not be completely out of markets: If your investment plan has enough time, you would not want to be at extremes on your asset allocation.

5) Focus on absolute returns: Do not measure your portfolio constantly to benchmark indices on a monthly, quarterly basis. You are not a fund manager, your investment objectives are unique, hence, measure performance accordingly.

6) Diversify: Across asset classes (equities, fixed income, real estate, alternatives) and countries. Remember Indian stock market capitalisation is less 3 percent of global market capitalisation

7) If you are fully invested, find a way to hedge

Happy investing!

(The author is Head – Edelweiss, Private Wealth Management)

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Anshu Kapoor is the Head of Edelweiss Private Wealth Management.
first published: Jan 26, 2021 08:14 am

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