I hope you’re as eager as I am to delve into a unique investing strategy that has proven to be a game-changer for me. In my previous blog, I promised to unveil not just one, but two investing strategies—one that I personally use, and another that’s accessible to all. So, buckle up as we explore what I consider the best investing strategy.
Now, before we dive into the strategy itself, let me clarify that this is not a recommendation. It’s simply a method that has worked well for me, and you are free to choose whether or not to incorporate it into your own investment approach.
So, what’s this winning strategy? I call it “Averaging,” but with a twist. Before you raise an eyebrow at the mention of averaging, let me assure you that this isn’t the conventional approach you might be familiar with. We won’t be averaging down on individual stocks, which, as many seasoned investors will tell you, can be a risky move.
Let’s break it down. Traditional averaging involves buying more of a stock as its price falls. For instance, if you initially invested ₹1 lakh in a stock at ₹100 per share, and it drops to ₹90, you might be tempted to invest another ₹1 lakh, hoping for a rebound. However, this strategy can be perilous, as stocks can plummet without warning.
Take, for instance, the colossal fall of Yes Bank, once a ₹400 stock reduced to a mere ₹5 or ₹6. Another example is Vodafone Idea, experiencing a significant decline. Imagine averaging down in such situations—it could potentially wipe out your investment.
But fear not, because the strategy I propose involves averting this risk by focusing on a more stable and resilient option: Index ETFs. Yes, you heard it right—we’re applying averaging to Exchange Traded Funds that track market indices. Unlike individual stocks, the chances of an index reaching zero are practically nil.
Consider the Nifty index; while it may experience a 50% or even a 70% dip, the probability of it hitting zero is close to zero. This stability is also present in other indexes like Nasdaq. And remember, we discussed popular ETFs in my previous blog. By investing in the right ETFs, you’re essentially securing your investment against the possibility of total loss.
Now, let’s understand the strategy in action. Imagine you’ve invested ₹1 lakh in an index ETF, and the market takes a dip, causing your investment to drop to ₹90,000. Here’s where the magic happens. Instead of panicking or averting losses by selling, you decide to employ averaging.
In the traditional sense, averaging might involve pouring more money into a losing stock. But with index ETFs, we take a different approach. You invest an additional ₹1 lakh, bringing your total investment to ₹2 lakh. Now, you’ve effectively lowered your average purchase price, and the market has room to recover.
Why does this strategy work better with index ETFs? Because, in the long term, indices tend to trend upward. The famous saying, “In the long term, whether it’s a human or the stock market, it has to go up,” holds true. Applying averaging to index ETFs means you’re capitalizing on the inherent upward trajectory of these funds.
Let’s be clear—this strategy doesn’t guarantee immediate profits or shield you from short-term market fluctuations. However, over the long term, history shows that indices tend to appreciate. By strategically averaging down during market downturns, you position yourself for potential gains as the market rebounds.
In today’s financial landscape, investing in Exchange-Traded Funds (ETFs) has become increasingly popular due to their simplicity and diversification benefits. Whether you’re a seasoned investor or just starting out, understanding how to effectively navigate the world of ETFs can be the key to building a robust investment portfolio.
Let’s delve into the concept of averaging and portfolio selection to grasp how to make informed decisions when it comes to ETF investing.
Picture this: you’re sitting in front of your screen, ready to make some investment moves. The first step is to choose which ETFs to include in your portfolio. But before we get into the nitty-gritty, let’s break down the rationale behind each decision.
First up, let’s talk about gold. Gold is often considered a safe haven asset, providing hedging opportunities in times of market volatility. Whether you’re a trader looking to hedge your portfolio or a long-term investor aiming for stability, gold can play a crucial role in diversifying your investments.
Now, when it comes to investing, it’s essential to differentiate between trading and long-term investing. Trading involves buying and selling assets within short time frames, while long-term investing focuses on holding assets for extended periods, sometimes even passing them on to future generations.
When considering your investment horizon, it’s crucial to align your asset allocation with your goals. For instance, if you’re investing for a short period, say less than five years, it’s advisable to steer clear of risky assets like equities and focus on safer options like bonds or debt mutual funds.
Government securities, represented by the 754GS bond, offer a stable option for investors with lump sum amounts. These bonds provide a fixed interest rate, ensuring steady returns without exposing your capital to significant risks.
Now, let’s shift our focus back to ETFs. As we navigate the ETF landscape, it’s essential to have a systematic approach to portfolio selection. Averaging, as the name suggests, involves buying assets at regular intervals to spread out the impact of market fluctuations.
To illustrate this concept, let’s consider an example. Suppose we’re looking at the HDFC ETF of small-cap stocks, currently priced at Rs. 143. Our strategy revolves around buying ETFs that have experienced a decrease in value on a given day.
For instance, if the gold ETF is down by 0.32%, trading at Rs. 32,000, we may choose to purchase it to capitalize on potential future gains. Similarly, if another ETF, priced at Rs. 26,000, experiences a 0.26% decline, we might include it in our portfolio as well.
By strategically selecting ETFs that have dipped in value, we aim to take advantage of potential market upswings while mitigating downside risks. This approach allows us to build a diversified portfolio while adhering to a disciplined investment strategy.
Now, let’s delve into the practical aspect of executing these trades. Whether you’re using a desktop or mobile platform, the process remains the same. Once you’ve identified the ETFs you wish to purchase, you can place your orders accordingly.
For instance, if you’re buying the small-cap ETF at Rs. 143 and the gold ETF at Rs. 32,000, you can determine the quantity of each ETF based on your desired investment amount. By setting limit orders or buying at market price, you can execute your trades seamlessly.
As we execute our trades, it’s essential to stay disciplined and adhere to our predefined strategy. By focusing on ETFs that have experienced declines in value, we aim to capitalize on potential market inefficiencies while minimizing downside risks.
In the realm of investments, navigating through various strategies can be daunting. With the market’s unpredictability, it’s crucial to have a clear understanding of your approach and its implications. Today, we delve into an insightful conversation about investment strategies, highlighting key considerations and practical applications.
Let’s start with a simple yet effective strategy employed by many investors – averaging down. This strategy involves buying more of a particular asset as its price decreases, thereby lowering the average cost per unit. But how does one determine when to execute this strategy? Here’s where percentages come into play.
Imagine you’ve allocated Rs. 1 lakh for investing in ETFs. If an ETF experiences a 1% decline, you decide to invest the allocated amount. However, this approach can be personalized based on individual preferences. Some may choose to invest Rs. 10,000 when an ETF declines by 1%, while others may opt for a different fixed amount each month.
Now, let’s delve deeper into the concept of averaging down. Picture this – the market experiences a significant downturn, possibly up to 70%. In such a scenario, your investment approach should align with your financial capacity and risk tolerance. If you’re prepared to invest Rs. 70,000 when the market corrects by 70%, then this strategy could work for you. However, it’s essential to evaluate whether you have the liquidity to sustain such investments.
Consider a scenario where you aim to invest Rs. 10,000 in ETFs. If the market undergoes a 70% correction, you would need Rs. 7 lakhs to capitalize on this opportunity. Additionally, if you’re diversifying across multiple ETFs, the required investment amount would increase accordingly. For instance, investing in two ETFs would necessitate Rs. 14 lakhs. It’s crucial to assess whether your financial resources align with these investment requirements.
Moreover, implementing the averaging down strategy entails strategic buying based on percentages rather than fixed amounts. By adhering to this approach, you capitalize on market fluctuations more effectively. For instance, when the market experiences a 2% decline, you invest proportionately. This method ensures a disciplined approach to investing, aligning with market movements.
However, maintaining a stable mindset amidst market volatility is paramount. Emotions often sway investors, leading to impulsive decisions. To counteract this, consider diversifying your portfolio with government securities. These stable investments offer a sense of security during turbulent market conditions, providing a buffer against emotional responses.
In the realm of financial planning and investment, strategic maneuvers often dictate success. Today, let’s delve into two powerful strategies that can potentially reshape your investment journey.
Imagine this scenario: as ETFs take a dip, you swiftly reallocate funds from government securities to capitalize on the market downturn. It’s a strategic move, for when the market plunges, government security rates tend to rise—a crucial inverse relationship worth noting. Furthermore, gold often thrives amidst market turmoil, serving as an effective hedge.
Consider this: if you invest a lump sum in government securities, you’ll enjoy steady interest returns. The key lies in adopting a long-term perspective, disregarding minor price fluctuations within a narrow range. Government securities typically oscillate between ₹101 and ₹105, offering a stable investment avenue.
Now, let’s dissect the second strategy. Picture yourself investing a fixed amount through SIPs (Systematic Investment Plans) monthly, spreading your investments across multiple ETFs. If the market falters, you seize the opportunity, purchasing more units at discounted rates.
In this method, consistency is key. Regardless of market volatility, you adhere to your predetermined investment amount. This disciplined approach ensures that you capitalize on market downturns, ultimately averaging your returns over time.
Let’s crunch the numbers. If you commit to investing ₹20,000 monthly across three ETFs, you’d allocate roughly ₹333 per day (considering a 20-day trading month). The beauty lies in simplicity—when an ETF dips, you buy without hesitation, adhering to your fixed investment amount.
For instance, if an ETF drops by 1%, you’d allocate ₹330 to it. Regardless of market fluctuations, you maintain this disciplined investment approach, ensuring consistent capital deployment.
By adhering to this method, you mitigate the impact of market corrections. Whether the correction is minor or substantial, your fixed investment amount ensures a balanced approach, potentially yielding superior returns over time.
Let’s not overlook the importance of meticulous planning. Keeping track of your previous purchases ensures a systematic approach to investing. Consider maintaining an Excel sheet to monitor your transactions, ensuring precision and efficiency.
Now, let’s revisit the numbers. If an ETF is down by 0.15% at 2 o’clock, and you’ve set aside ₹15,000 for investment, you’d allocate around ₹143 to each ETF. This method allows you to capitalize on market dips, gradually building a robust portfolio over time.
In essence, both strategies aim to achieve the same goal: maximizing returns while minimizing risk. Whether it’s strategically reallocating funds during market downturns or consistently investing a fixed amount, the objective remains constant—building wealth over the long term.
As you embark on your investment journey, remember the cardinal rule: consistency breeds success. By adhering to a disciplined investment approach, you pave the way for financial prosperity, one carefully calculated step at a time.
In conclusion, mastering investment strategies is a journey—a journey marked by discipline, foresight, and calculated risk-taking. Whether you opt for strategic reallocation or consistent SIP investments, the key lies in unwavering commitment to your financial goals.
So, fellow investors, seize the opportunities, navigate the uncertainties, and embark on this exhilarating journey towards financial independence. The road may be fraught with challenges, but with steadfast determination and strategic acumen, success is within reach.
And remember, the path to financial freedom begins with a single step—a step towards informed decision-making, prudent risk management, and unwavering commitment to your financial goals. So, take that step today, and embark on this transformative journey towards a brighter financial future.