Continuing with our article series on ‘Do you know the CAGR of your entire portfolio?’ let’s focus on ways to maximize the same. The previous article highlighted how behavioural biases can reduce CAGR. In this article, we will focus on a few other methods to optimize CAGR. Let’s begin-
Nothing beats a good research on stocks-
An investor must know what his portfolio consists of. Consider it as your job where you know everything that you do and research or learn what you don’t. Stocks are similar to that, invest only in those businesses which you understand thoroughly. Research if you don’t and then invest. It is on the basis of this research that an investor decides who to cut loose as market scenarios change.
Don’t waste time to cut losers loose and don’t rush to sell the winners-
One of the many reasons why investors create less wealth is because they sell their winners too fast and regret it later. Nothing creates more jealousy than seeing a stock outperform when it’s no longer a part of your portfolio. Hold onto your winner stocks because they are your best friends and real creators of wealth. But don’t waste time cut losers lose because they will drag your CAGR down.
Always invest with a 10-to-15-year timeline in mind
Investing is a long-term activity because compounding needs time to show its effects. For a period of 10 years, a 5% CAGR generates 63% return, 10% CAGR generates 159% return, 15% CAGR creates 305% returns and a 20% CAGR gets you 519% returns!
Begin your investment journey early
Since we are talking about investing with a broad timeframe in mind it is wise to begin investing early. The “dude I’m just 25 to save for retirement” lands you in trouble when you retire. If an investor begins his investment journey at 30 he makes Rs.16 Crore less than the person who started in his twenties when he retires! To read in detail about how early investing can create wealth read here- Start investing early and let compounding do the magic for you. (fivecapital.in)
Choose the right advisor-
In a complex world of stocks, bonds, balance sheets, excel sheets, financial ratios it’s always best to have a guiding light. Advice from a professional, qualified SEBI registered investment advisor helps you to achieve your financial goals in due time. DIY investing is cute but not a smart choice.
Choosing dynamic asset allocation-
Asset allocation balances risk and returns by investing in a portfolio that resonates with the investor’s goal, risk appetite and time. The portfolio’s assets are divided into equities, fixed income, cash and equivalents. Since the market is constantly changing choosing a dynamic asset allocation that changes according to macro trends and stages in an investor’s life helps in optimizing (not maximizing) CAGR. If an investor is young, he can have a risky portfolio, while investors close to retirement age opt for fixed income.
Rebalance periodically. Be active. Track
Once you invest in stocks lie back and go for a siesta while the market creates wealth for you. Whoever advises this does not know the basics of investing. Since the market is dynamic, it keeps on changing. Rebalancing (buying and selling stocks) makes sure that changing market scenarios do not affect your CAGR. Not just rebalancing but periodic rebalancing is important. So don’t go for a siesta, keep on checking in a while.