ET Wealth | How to maximise returns in long-term | Economic Times

Sujay is looking forward to a rosier 2021. The year 2020 was a challenging one for many high net worth investors, including himself. Living it day to day was a challenge. In particular, the dark days of March and April had him doubting his overall portfolio allocation and strategy. During the crash, Sujay was faced with a dilemma. Should he sell and wait out the pandemic or stay invested? He made some drastic decisions during that time–decisions that have had a long-term impact on how his portfolio performed through year-end, as the stock market returns ended up being the brightest spot in a dark year. This type of market performance looks smooth in retrospect and he wonders how he should position his investments going forward.Investors who maximised their investment returns in 2020 were found to have followed three basic strategies— having the appropriate amount of fixed income in their portfolio, staying invested and continuing to buy throughout the year. While they may have had some uncomfortable moments while navigating the markets, they are reaping the rewards as we move into 2021.In the low yield environment of 2020, Sujay was often questioning whether it was even worth having bonds in the portfolio. But he must understand that the key part of having bonds as an allocation in the portfolio is not about getting returns as much as it is about cutting volatility so that investors can participate in the equity markets. It is the ‘sleep at night’ allocation of the portfolio. During the intense volatility of March and April, the bonds helped mitigate severe drop in the portfolio return. The deep rate cuts further accentuated the returns on bond funds, again making the point that investors may not always be able to truly guess how an asset class may perform. This makes a strong case for an asset allocation based approach.Experienced investors took the option to stay invested during the market crash of 2020 for two reasons. While the markets are volatile, it could be unwise to exit as long as the underlying fundamentals of the market were intact. Even if they had guessed correctly on when to sell; it is re-entering the market that is a trickier decision. Sujay has now realised the same. Staying invested and riding through the volatility, the hope was that ultimately in the long-term the market would return. Additionally, he would have realised that buying during a downturn is psychologically difficult. While the idea is buy low and sell high, actually in a crisis, the human instinct is to flee to safety.Investors like Sujay really need to focus on their long-term plan. Having the right fixed-income allocation would have allowed him to weather the challenges in these markets. Also, rather than giving into the emotional impulses, it is always better to consistently be buying in the equity markets. A ‘buying consistently at regular intervals plan’ can take a lot of the heartache out of making these decisions.(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)