Everyone do long term equity investments with one common objective, that is to earn higher returns than fixed income instruments and beat inflation.

So is this the right objective of long term investments, to earn returns.No I think the main goal is to create wealth.

See if you are earning a return of let’s say 150%, but the amount you invested in the asset was 5% of your portfolio total value.
It doesn’t add up into your overall return.

But one major element that affects the overall returns of investor is the Right ALLOCATION.

You should remember that the overall portfolio return is the weighted average return, not the simple average return of the individual stocks.

Even the Nifty which we know has given a return of 15% CAGR since its inception does not give equal weightage to each stock.
It gives considerably high weightage to top performers on the basis of their market capitalization.

After selecting the right/good quality stock or fund the second most important thing is to do proper allocation to it.

Why do we fail to do the right allocation?

1. Low price stocks – Investors always tend to fall for earning higher returns through low price stocks.
The ideal mindset here is that they can buy a large quantity at a low price, altogether avoiding the quality of the stock. As everyone has limited capital, this leads to the allocation to the losers.
The bias of buying a low price stock will lead to a portfolio of junk stocks.

2. Averaging – When a stock starts falling, there is a common mistake most investors make is to average the cost price by buying the stock at lower levels. I m not saying averaging is wrong but one should always check the fundamentals and the reasons behind the fall and average at the right price.
Ultimately we keep on buying losers and allocate less amount to gainers.

3. Conviction – The main reason why we fail to allocate to the top performers is because of the lack of confidence. We do not do proper research or do not have complete knowledge about business operations.
Thus in volatility, we lose trust and miss out the opportunities.

What should be done?

First, everyone should know what their investment goal and the risk profile are.
After that, the ideal strategy should be to Allocate the major percentage of your capital to the low-risk assets first.
For, eg in Equity,

Large Cap > Mid Cap >Small Cap

And, Buy Quality over Quantity.

Please leave your comments below.
Happy Investing!!