InvestorQ : How can I as an investor actually benefit from a phased approach?
Lavanya Subramanian made post

How can I as an investor actually benefit from a phased approach?

Arusha Ray answered.
3 years ago

If it is all about getting the right price in a volatile market then a phased approach works to perfection. The most basic argument in favour of a phased approach is that you can get the best possible price in the market for the stock. Of course, it is not possible to practically catch the bottom but by buying through the consolidation phase of the stock, the actual buying cost will be as close to the bottom as possible. Also you have the flexibility to increase your allocation when the prices are lower which pulls your average cost of buying closer to the bottom of the stock price. In this case, dynamic rupee-cost averaging works perfectly when you are trying to buy stocks to profit from.

There is a basic point to remember here. The phased approach to investing works best in a lacklustre market or in a market that is trending downward. In both the markets, the common tendency among investors is to sell on rises. This is in contrast to a frenzied bull market where the normally tendency is to buy on every dip. Since the undertone of the market is to sell on rises, you will find sellers at higher levels putting consistent downward pressure on the stock. This will ensure that you will consistently get lower prices to enter the stock till the last weak hand has been squeezed out of the market.

Don’t get overexposed to one particular stock. At the end of the day, your core purpose is to create a portfolio of stocks. Decide the outer limit of the number of stock that you want to buy and phase your buying accordingly. That is the only way you can get the best possible price. You need to zero in on 5-6 stocks that you are going to buy in a phased manner and decided the individual allocation for each of them as well as the price range in which you will execute your entire purchase.

Any phased approach has to keep the quality perspective in mind. It is ok to adopt a phased approach in a quality stock but not in a junk stock. Keep an eye on the quality of the stock. There are stocks that are down due to structural reasons. We have seen that happen in the case of stocks like Kingfisher, Deccan Chronicle, Jaypee Associates, and RCOM etc. In all these cases the key reason for the underperformance was the unsustainable level of debt in the balance sheets of these companies. These are companies to be avoided. No amount of phased buying can ever make you profitable on these kinds of stocks.

Your phased approach must be in relation to the overall market conditions. Know when to put your full stop to buying and change course. What happens if you are buying the stock but realize that the market is heading for a prolonged slowdown and the markets could remain tepid for over 3-4 years. We saw that kind of a market in the mid-nineties. Even if you adopt a phased approach, the opportunity cost of buying in that market will just be too high.

Last, but not the least, never forget your context of investing. Remember, that equities are just one of the asset classes and your job is to allocate your money to the asset class that offers the best risk-adjusted returns. If debt funds or gold is offering better risk-adjusted returns then you can as well park your money in these assets and wait for an opportune time in the future to buy stocks in a phased manner. Investing, at the end of the day is all about asset allocation. You have different classes of assets like debt, equity, gold, liquids, claims etc. Put your money in the asset that gives the best risk adjusted returns. That is what matters in the final analysis.