You love stocks and you have invested in some really good ones over the years. Simply speaking, you have a very good equity portfolio. If you want returns above inflation, you must invest in equity. You also have to stick with your equity portfolio for the long term.
But, there's a problem. As you invest in a very good equity portfolio, some bad stocks can creep in. Holding on to these stocks for several years means you are holding on to losses. Don't you think this is the right time to cleanse your equity portfolio?
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4 Evils Which Destroy Your Equity Portfolio
The first question you must ask yourself....Why are you investing in an equity portfolio? Is it to build wealth or grab some quick spending money? Your equity portfolio has twin benefits. It gives you returns above inflation (CPI inflation was 3.28% in September), and also helps save tax.
If you stay invested in equities for a year and then sell, your capital gains are tax free. But, you get good returns from your portfolio, only if you destroy these 4 evils in your portfolio.
Although it's easy to forget sometimes, a share is not a lottery ticket. It's part-ownership of a business. The first thing you need to remember when you buy a stock? You are now a partner in the Company. Ask yourself....
Is this company making profits and does this Company have a track record of good earnings? If yes, only then commit your money to this stock investment.
If this Company doesn't have good earnings, don't invest. You have saved your portfolio from the first evil.
2. Don't invest in a Company with too much debt
It's very dangerous to invest in stocks of Companies with too much debt on the balance sheet. Debt is like a weight on your back. Too much of it can be very bad for your equity portfolio. Check the debt to equity ratio to spot Companies carrying too much debt.
If the debt to equity ratio is more than 50%, the debt owners own more assets in this Company, than the equity holders.
If you have not invested your money in the stocks of a Company with high debt, you have saved your portfolio from the second evil.
3. Don't invest in a Company with bad management
The management of a Company says it all....Don't invest in the stocks of a Company with bad management. This can be a terrible mistake. Check the historical ROE (Return on Equity) of a Company. If it is lower than 15% for several years, it may be good not to invest in such a Company.
ROE tells you how much profit a Company has generated, with the money shareholders have invested in it.
Don't invest in the stocks of a Company with bad management. The people may be nice, but not nice to your money. You have saved yourself from the third evil.
You must always buy the right stock at the right price. If you pay too much for a stock and add it to your equity portfolio, you destroy the chances of building wealth. Check the Stock P/E Ratio before investing in it. Is it greater than 30? It may not be good to invest in stocks with too high a PE Ratio.
For those who don't know, PE Ratio is the amount of money you are willing to pay for each rupee worth of earnings of the Company.
Don't invest in the stocks of a Company with too high a PE Ratio. Never pay too much for a great Company. Save yourself from the fourth evil.
SEE ALSO: How to invest in stocks?
The stock market is on a bull run. If you really want to enjoy the bull run and watch your stocks sail, clean up your equity portfolio...Now. Cleanse your portfolio from these 4 evils and march on the way to riches. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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