In January 2008, the Nifty peaked at 6,357 after suffering a freefall from there, it recovered to 6338 by November 2010.
From there on, the Nifty50 remained range bound till December 2013 when it picked up pace and finally crossed 6400 in March 2014. Then, the Nifty galloped beyond 9000 in March 2015.
Now imagine if one had invested his entire investment capital in Nifty in January 2008. That investor would have had to wait till March 2014 to just break even.
Hence, while investing a substantial amount in equities, it might be a good idea to adopt a staggered approach. Here are 4 reasons why this could be useful:
Earlier in the article, we saw how investing in the index at the peak could mean waiting for a long time to break even. Now, let us observe something similar with the share price of a company.
1)Averaging could improve the return on investment
Earlier in the article, we saw how investing in the index at the peak could mean waiting for a long time to break even. Now, let us observe something similar with the share price of a company.
For example - Asian Paints recorded its all-time high share price of 3590 in January 2022. Then, it fell for a few months and climbed back to 3545 in August 2022.
Let us consider a scenario where one had invested Rs 1 lakh in
On 17th August 2022, the share price of Asian Paints was Rs 3545 and hence the value of the investor’s corpus would be around Rs 1,03,018. This a profit of barely 3%.
Let us consider a scenario where one had invested Rs 1 lakh in
Asian Paints.
NSE 1.72 % and purchased its shares at Rs 3440 on 3rd January 2022.
On 17th August 2022, the share price of Asian Paints was Rs 3545 and hence the value of the investor’s corpus would be around Rs 1,03,018. This a profit of barely 3%.
However, during the period between Jan 2022 and August 2022, the share price of Asian Paints plummeted to Rs 2560.
Let us consider another scenario where one purchases 5 shares of Asian Paints on the first day of every month (when the market is open) between January 2022 and August 2022.
Let us consider another scenario where one purchases 5 shares of Asian Paints on the first day of every month (when the market is open) between January 2022 and August 2022.
In this case, the investor holds 40 shares and the amount invested is Rs 1,25,845. As written earlier, the share price of Asian Paints on 17th August 2022 was Rs 3545. Hence, the value of the investment as on 17th August 2022 would be Rs 1,41,800.
So, if one had purchased shares of Asian Paints in a staggered manner, one could have averaged one’s buying price and thus be enjoying decent returns of almost 13% by August 2022.
To summarize, a staggered approach of buying shares offered returns of 13% over 8 months as compared to returns of 3% by investing at one go.
2)Begin small
It may not be wise, even for seasoned investors, to invest a large amount at one go. This would mean making a large financial commitment that could also make an investor jittery if the investment goes south in the short-term.
By investing in a staggered manner, one can begin with a part of the overall investible surplus.
Hence, even if one doesn't have enough in the beginning, one can always begin with the amount at hand. After arranging for cash in the following months, one can continue to invest.
So, if one had purchased shares of Asian Paints in a staggered manner, one could have averaged one’s buying price and thus be enjoying decent returns of almost 13% by August 2022.
To summarize, a staggered approach of buying shares offered returns of 13% over 8 months as compared to returns of 3% by investing at one go.
2)Begin small
It may not be wise, even for seasoned investors, to invest a large amount at one go. This would mean making a large financial commitment that could also make an investor jittery if the investment goes south in the short-term.
By investing in a staggered manner, one can begin with a part of the overall investible surplus.
Hence, even if one doesn't have enough in the beginning, one can always begin with the amount at hand. After arranging for cash in the following months, one can continue to invest.
3)Opportunities could be available at cheaper valuations in the future
Valuations of certain stocks could correct after one purchased them despite the market going up. This could happen due to news-based events such as the resignation of the CEO or the introduction of a new competitor.
Valuations of certain stocks could correct after one purchased them despite the market going up. This could happen due to news-based events such as the resignation of the CEO or the introduction of a new competitor.
For instance, the share price of Jubilant Foodworks NSE 0.36 % plunged by almost 15% on 14th March 2022 as a reaction to the then CEO’s exit. But, it has recovered sharply since then.
Similarly, adopting a staggered approach would enable an investor to purchase shares of fundamentally strong companies when valuation becomes attractive.
Yet, investors must bear in mind that in select cases opportunities could become dearer – for instance in the period from April 2020 onwards. However, according to our analysis at a portfolio level, a staggered approach works out well over the long term.
4)Enables ‘Regret Minimalization’
An individual who invests in one go may suffer regrets later, especially if this person has not invested in the right kind of stocks.
Therefore, the losses suffered may also be higher. But, if one adopts a staggered approach, one can avoid suffering regrets.
Therefore, just like how investors have used the SIP approach to create wealth by investing in mutual funds, one can use a ‘staggered approach’ to create wealth by investing directly in equities.
An individual who invests in one go may suffer regrets later, especially if this person has not invested in the right kind of stocks.
Therefore, the losses suffered may also be higher. But, if one adopts a staggered approach, one can avoid suffering regrets.
Therefore, just like how investors have used the SIP approach to create wealth by investing in mutual funds, one can use a ‘staggered approach’ to create wealth by investing directly in equities.