By Manish Goel
Long-term investing is a proven and effective way for retail investors to create wealth. Investing experts speak about investing in good stocks and forgetting about them. Although that may have worked for certain investors, it doesn’t mean that you take the long-term investment approach for granted. Here are five things to keep in mind if you are planning to invest for the long term:
Defining long term
Firstly, an investor may want to define the time span of ‘long term’. For certain investors, the long term might be five years whereas for others it could be more than a decade. Depending on this, you may suitably allocate capital, align your goals and set expectations. For instance, if you are investing for creating a corpus over the next five years that can be used for the down payment of a new house, then your investment approach would be different as compared to investing for building a corpus for retirement that could be two decades away.
Tracking companies in a stock portfolio
We conduct thorough research before investing in a company. But investing for the long term doesn’t mean that you should stop tracking the company after investing. You have to scrutinise transcripts of the calls that the management has with analysts and the annual reports to look out for any red flags. By thoroughly analysing annual reports for the past five to seven years, you would be able to infer whether the company lives up to its commitments and is on the right track.
Being cognizant of CAGR
Investors speak about stock portfolios that have offered 2x returns, 4x returns, or 10x returns. But you have to evaluate the compounded annual growth rate (CAGR) of your portfolio to understand whether the investment strategy has worked over the long term. For instance, if your portfolio goes up by 3x over 12 years, then such a portfolio has earned a CAGR of just 9.59%. This portfolio would have even underperformed the index as Nifty has offered a CAGR of almost 14% over the last couple of decades.
Avoiding emotional attachment to stocks
Quite often, retail investors may get emotionally attached to a stock. This would prevent an investor from taking rational decisions when it comes to selling the shares of such a company when it underperforms. Worse, if a retail investor needs funds, then he may end up selling shares of a company that holds tremendous promise to grow rather than selling shares of an underperforming company to which he is emotionally attached.
Practising sector rotation
There could be certain sectors in your portfolio that could underperform during a specific period. For example, there have been phases of underperformance and high performance for companies in sectors such as pharmaceuticals, NBFC, and capital goods. Therefore, you have to keep a close eye on these sectors if you are planning to take comparatively long-term positions in these stocks. If your investment thesis in such sectors does not play out, you may need to replace shares of companies in such sectors with that of companies from other sectors.
Long-term investing requires you to remain patient for your holdings to grow. It also requires you to never be complacent about your holdings and keep monitoring the performance of your portfolio.
The writer is founder and director, Research & Ranking
* Never be complacent about your holdings. Keep monitoring your portfolio’s performance
* Be sure how you want to define the time span of ‘long term’
* Don’t get emotionally attached to a stock. Take rational decisions