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Every year, on the 7^th of April, the World Health Organisation celebrates World Health Day. The initiative aims to spread awareness about important health issues, be it mental health, child health or climate change. This year’s theme—Eliminating Health Inequalities—is an interesting one. It highlights the role economic stability plays in good healthcare. This is an important connection to make at the global level, but also at the level of individuals. Sound finances contribute to your physical and mental health.

A strong equity portfolio grows your finances. By investing in the stock market, you stand to enjoy much higher returns than those offered by traditional avenues. Your 20s are a great time to invest in equities as you have age on your side, and the financial bandwidth to opt for higher-risk, higher-return investments. This World Health Day, commit to boosting the health of your finances by building a strong equity portfolio. Here are some tips to help you do this.

Eyes on the prize

It’s important to list out all that you want to accomplish through your investments. Do you want to secure your retirement years, save for a course, buy a house or start your own business? These financial goals matter as they will help you structure your investment portfolio. In your 20s, you best asset is time, so aim for long-term investments with financial growth as your objective. You could also invest in short-term funds if a financial goal requires liquidity in the near future. At 25, what matters the most is that you start investing. Over time, you can add or subtract financial goals and tweak your investments to support them.

Diversify and conquer

Diversifying your portfolio protects your investments against unpredictable mishaps. Your portfolio should have a good mix of equity and debt funds. The 100 minus your current age rule is a good way to determine what portion of your portfolio should equities constitute. So, if you’re 25, equities should make up 75% of your portfolio (100 minus 25 equals 75).

Stick to about 10-15 good stocks spread across 2-5 sectors to diversify risk. Focus on investing in sectors and industry groups that fall within the 11 Global Industry Classification Standard (GICS) sectors, like Energy, IT, Real Estate, Telecom, Healthcare, Utilities and so on. A healthy practice is to not invest a lot of funds in a single sector or related sectors, but to spread funds in domestic and international stocks across different sectors.

KYC (Know Your Company)

Have a clear understanding of the financials of the company you’re investing in so that you don’t overpay for a stock. A few things you could check are:

• Price-to-Earnings ratio (P/E). Divide the company’s market value per share by its earnings per share. Fast-growing companies with a lower P/E are worth considering.
• Price-to-book ratio or P/B (market value per share divided by book value per share). Any value under 1 is considered a good P/B. This should be read in tandem with a company’s Return on Equity.
• Return on Equity (RoE). This tells you how much profits a company is generating from shareholders’ equity. There shouldn’t a major discrepancy between P/B and RoE. Low RoE and high P/B ratios is a sign of an overvalued stock.
• Beta helps you understand a stock’s volatility. Decide if you want to go with a stock with high beta (that is, open to market risks, but has high earning potential) or a less volatile one (low-risk, but lower returns as well).

Investing in a company with high dividends (sum of money paid to shareholders periodically) is a tried-and-true strategy if you don’t have the time to watch the market closely.

Take stock of your stocks

You should review your portfolio every 6-12 months and check if it matches your ideal asset allocation (100 minus your current age for equity/debt ratio). If you feel your current portfolio doesn’t reflect your ideal asset allocation, you can buy or sell shares to rebalance your portfolio. So, say you want to invest more aggressively, you can invest in stock funds to up your percentage of equity investments. Other reasons you might want to rebalance your portfolio is in response to market trends or to make it more tax efficient.

Develop good (investment) habits

Along with investing early, it’s also important to develop healthy investment habits like:

• Being consistent: Even if you can invest a small amount, do it every month. Be watchful of your monthly expenditures and never dip into the budget you’ve set aside for your investments.
• Developing patience: It’s tempting to check the value of your portfolio or what’s happening in the market every day, but acting on this impulse could lead you to make knee-jerk decisions that may not work in your favour in the long run.
• Not timing the market: Timing the market means attempting to predict the highs and lows of the stock market and buying and selling shares based on these predictions. However, this is a risky thing to do and isn’t a sustainable way to manage your investments.
• Learning from your mistakes: Accept that you will make a few bad decisions. But don’t give up because of them. Choose to learn from them instead, as experience really is the best teacher.

Now that you know how to build a smart and effective investment portfolio, don’t waste another minute. Start your investment journey today. May you start strong and live long!