Risk of Not Investing in Equity Market -Blog by Harsh Joshi | Motilal Oswal
Risk of Not Investing in Equity Market -Blog by Harsh Joshi | Motilal Oswal

What is the risk of Not investing in Equity Market?

Motilal Oswal Securities ltd.Publish many reports that explain how equity can help to achieve all the needs of investment. If you need TAX benefit-equity is the asset class, for wealth creation you should invest in asset class.

Here we would like to explain you, HOW it is riskier if “YOU DON’T INVEST IN EQUITY MARKET”

Do you know in long term investment in Equity is more safer, because there is only 2% probability of losing one’s investment in 5 years of investment horizon, and this become ZERO percent chance of losing money if one invest for 10 years. Mr. Raamdeo Agrawal has also explained in his Equity market reports and many public domains that “EQUITY- the asymmetric payoff limited risk with unlimited opportunity”.

Equity market has limited downside in any stock of 100% i.e. the stock price falling to zero. However,there is no limit to how high a stock can go. It means, equity has limited downside risk but unlimited upside opportunity.

How the asymmetric payoff plays out?

Portfolio

Amt. invested

Return profile

Value in Rupees

After 5 years

After 10 years

Stock 1

20

100% loss

0

0

Stock 2

20

50% loss every 5 years

10

5

Stock 3

20

No change

20

20

Stock 4

20

25% annual return

61

186

Stock 5

20

40% annual return

108

579

Total

100

 

198.6

789.77

Return CAGR

15%

23%

 

This table explains that if you have invested in 5 stocks, and out of that 3 stocks are not performing and if TWO are performing, investor can generate 15% CAGR in 5 years and 23% CAGR in10 years on overall portfolio level. 

But, how to make the asymmetric payoff work for you

 

Don’t have too concentrated portfolio to avoid downside risk from your portfolio, but at the same time don’t invest in too many stocks which kills the overall return of your portfolio. So, don’t put all your eggs in one basket, neither keep too many baskets to keep your eggs. Ideal portfolio size should be 15 to 20 right stocks which generate returns for you in long term.

Build a right diversified portfolio—

As the popular quote of Warren buffet says, there are two rules of investing- Rule no. 1 “Never lose your money” & Rule no. 2 “Never forget the rule no. 1”.

Limiting the downside is all about buying right stock means building a portfolio of quality stocks with heavy long term earnings growth at a reasonable price. (This is captured by MOAMC investing style acronym- QGLP- Q; Quality | G; Growth | L; Longevity | P; Price.)

Limit the downside—

Investment is like a Test Cricket match, wherein you need performance with patience which result you winning the test batch. Similarly, to get the true potential of equity market, one should invest for long term. As has been said, “To make money in stocks, you must have the vision to see, the courage to buy and the patience to hold. Patience is the rarest of the three.”

 

In conclusion

Earning 9% risk free returns is history, lower interest rates are here to stay and we don’t envisage sovereign linked products to give high returns in the near future. Recent decisions of the EPFO to start allocating funds to equities are ample testimony to this trend. So, anyone who is looking for long term investment and look to generate double digit returns, equity is the product.

Maximize the upside—

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