By Sonam Srivastava

Investing in the stock market holds immense potential for long-term wealth creation. However, it is crucial to understand the key principles of building a diversified portfolio. Look at the right assets for your investing goals, harness the power of asset allocation and leverage tactical investing for long-term wealth creation.

Power of tactical investing

Tactical investing involves taking advantage of short-term market opportunities. By actively adjusting your portfolio in response to changing market conditions, you can enhance returns and manage risk. This strategy requires diligent monitoring and analysis. Tactical investing adds a layer of flexibility and adaptability to your portfolio.

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Understand diversification

Instead of investing all your money in a single stock or sector, spreading your investments across different asset classes and sectors can protect you if one area underperforms. For instance, if you invest Rs 10,000 entirely in one tech company’s stock and it drops 20%, you lose Rs 2,000. Instead, by diversifying — say, Rs 2,000 each in different sector stocks (tech, healthcare, manufacturing), a bond fund, and an international equity fund—you spread the risk. If the tech stock falls 20%, you lose only Rs 400.

Finding the right assets

Investing begins with identifying your goals. Whether you aim to secure a comfortable retirement, save for a dream home, or fund your child’s education, understanding your objectives helps shape your investment strategy. With clear goals in mind, you can select the right mix of assets that align with your aspirations, risk tolerance, and desired time horizon.

Power of asset allocation

Asset allocation is the cornerstone of a diversified portfolio. It involves spreading your investments across asset classes, such as stocks, bonds, real estate and cash equivalents. The key is to strike the right balance based on your risk tolerance and investment objectives. Equities offer potential growth but bonds provide stability. By diversifying your portfolio across assests, you can mitigate risk and capitalise on opportunities presented by different market conditions.

Diversification within an asset class

Diversification goes beyond asset allocation. Within each asset class, there are opportunities to further spread risk and enhance returns. For instance, within stocks, diversify across different sectors, market caps, and geographies. This allows you to benefit from varying growth drivers and reduces the impact of any single investment. A well-diversified portfolio hedges against specific risks while maximising your chances of long-term success.

Systematic investing

Rather than succumbing to short-term market fluctuations, this approach emphasises a steadfast commitment to your investment strategy. By adhering to a systematic plan and avoiding emotional decisions, you can weather market volatility and stay focused on your long-term goals.

Building a diversified portfolio is essential for long-term equity investors seeking sustainable wealth creation. By finding the right assets, harnessing the power of asset allocation, diversifying within asset classes, embracing tactical investing, and adopting a systematic and disciplined approach, you can navigate the dynamic world of investing with confidence.

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HEDGE THE BETS

* Within stocks, diversify across sectors, market caps, and geographies

* Strike the right balance between risk tolerance & investment objectives

* Tactical investing adds a layer of flexibility to your portfolio

The writer is founder, Wright Research