The Hindu Business Line : Is equity less risky?

THE sharp decline in the stock market in the last few trading sessions has not really disturbed the long-term investors. They think that their investments can still become profitable over the long term. The perception is that equity is less risky over the long run. How valid is this belief? Suppose you had constructed a portfolio worth Rs 10 lakh in 1996 with an investment horizon of five years. Imagine how your portfolio would have performed after the crash in technology stocks pulled the market down in 2000?

Or consider this. You decide to invest in equity to pay your child's higher education. The objective is to earn Rs 25 lakh in 10 years with an initial investment of Rs 10 lakh. This is not difficult considering the returns the market has provided in the last two years.

But what if the market declines by 30 per cent in the year after you make your investment? You would have to struggle for the next couple of years to recover your capital. This makes it difficult for you to meet your objectives, even though your investment horizon is 10 years.

So, would you still argue that equity is less risky over the long term?

If you are convinced that it is not, you should not apply just fundamental analysis to construct portfolios. The above examples suggest that whether you are a value investor or a trader, entry/exit strategies are very important to meet your objectives.

Fundamental analysis tells you whether to buy a stock. Technical analysis tells you when to buy that stock. It also tells you when to exit the trade, especially if your analysis turns bad. It is such money management that makes equity less risky, not merely extending of the investment horizon.

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