Investment tip: Place your bet on low risk stocks

 

 

 I spent much of last week asking investment bankers what the best ever advice they ever got had been. To my surprise, everyone had a standard reply: "Give it your best and results will follow." This wasn't any different from what I had been advised as a child by many people.

But one story my father told stays with me: learn from the ants and how they save for a rainy day.
As children most of us have come across the story of the ant and the grasshopper. While the ant spent his winter drying grains collected in summer and lived well, the grasshopper died of hunger as it had not saved for the winter. The lesson: plan ahead or else don't complain if things don't work out.
Though investment goals differ from person to person, one can't run away from the fact that investment in equities is important for building wealth. According to the Reserve Bank of India (RBI), a mere one per cent of Indian household financial wealth is in equities and shares. A recent study by Axis Bank reveals that even if real estate is excluded from Indian household savings, less than six per cent of the saving is in equities. In the US it is around 45 per cent. There is no doubt that more of Indian household wealth has to be channeled into equity markets. But at the same time investors cannot be blamed for shying away, for many of them have not had pleasant experiences there despite the Sensex having grown more than 26 times in the last two decades.
The major reason is that investors have always invested when the markets were peaking. Their choice of investments has also often been wrong. Be it tech stocks in 2000 or infrastructure and real estate stocks in 2008 and 2009, investors have tried catching momentum stocks and highly volatile stocks such that when market went down by 10 points, their stocks slipped by 20.
The classical financial theory is: the higher the risk, the higher the returns and the lower the risk, the lower the returns. But that is not always true. According to a the study by Nardin Baker and Robert Haugen in April 2012, low risk stocks give higher than expected returns compared to high risk stocks. The study extends over the time period 1990 to 2011 and covers 21 developed markets and 12 emerging markets, including India. Though in the short-term, 'high risk equals high returns' is true, in the long-run, low risk stocks have always delivered better returns. Studies also reveal that over time equity tends to be less volatile. In fact over a 10 year horizon the probability of losing money is nil compared to 35 per cent in one year.
Benefits of long-term investing.


soruce- india today
anand maurya
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