4 Reasons Investors Should Take a Laddered Approach for a Long Time While Investing

In January 2008, the Nifty peaked at 6357 after experiencing a free fall from there, it fell back to 6338 in November 2010.

From there, the Nifty50 remained rangebound until December 2013 when it accelerated and finally crossed 6400 in March 2014. Then the Nifty galloped past 9000 in March 2015.

Now imagine if someone had invested all of their investment capital in Nifty in January 2008. That investor would have had to wait until March 2014 to break even.

So, while investing a substantial amount in stocks, it may be wise to take a laddered approach. Here are 4 reasons why it might be useful:

1) Average could improve ROI

Earlier in the article, we saw how investing in the index at the top could mean waiting a long time to break even. Now let’s look at something similar with a company’s stock price.

For example, Asian Paints recorded its all-time high of 3590 in January 2022. Then it fell for a few months and climbed back up to 3545 in August 2022.

Consider a scenario where one had invested Rs 1 lakh in

and bought its shares at Rs 3440 on January 3, 2022.

On August 17, 2022, the Asian Paints stock price was Rs 3,545 and hence the value of the investor’s corpus would be around Rs 1,03,018. This is a profit of barely 3%.

However, during the period between January 2022 and August 2022, the Asian Paints share price fell to Rs 2560.

Consider another scenario where one buys 5 shares of Asian Paints on the first day of every month (when the market is open) between January 2022 and August 2022.

Purchase of shares1Agencies

In this case, the investor holds 40 shares and the invested amount is Rs 1,25,845. As mentioned earlier, Asian Paints share price on August 17, 2022 was Rs 3545. Therefore, the value of the investment on August 17, 2022 would be Rs 1,41,800.

So, if one had purchased shares of Asian Paints in a ladder fashion, one could have averaged its purchase price and thus enjoyed decent returns of almost 13% by August 2022.

In summary, a laddered approach to buying stocks offered returns of 13% over 8 months, compared to returns of 3% investing all at once.

2) Start small

It may not be wise, even for seasoned investors, to invest a large sum all at once. This would mean making a large financial commitment which could also make an investor nervous if the investment deteriorates in the short term.

By investing in installments, you can start with a portion of the overall investable surplus.

So even if one does not have enough at the beginning, one can always start with the amount at hand. After arranging cash in the following months, one can continue to invest.

3) Opportunities may be available at cheaper valuations in the future

The valuations of certain stocks could correct after their purchase despite the rise in the market. This could happen due to current events such as the resignation of the CEO or the introduction of a new competitor.

For example, the share price of

plunged almost 15% on March 14, 2022 in reaction to the departure of the then CEO. But, it has recovered strongly since then.

Similarly, taking a laddered approach would allow an investor to buy shares of fundamentally sound companies when valuations become attractive.

However, investors should bear in mind that in some cases opportunities could become more expensive – for example in the period from April 2020. However, according to our analysis at the portfolio level, a laddered approach works well on the long term.

4) Enable “regret minimization”

A one-time investor may have regrets later on, especially if he invested in the wrong type of stock.

Therefore, the losses incurred may also be higher. But if you take a phased approach, you can avoid feeling regret.

Therefore, much like how investors have used the SIP approach to build wealth by investing in mutual funds, one can use a “ladder approach” to build wealth by investing directly in stocks.

(The author is Chief Investment Officer (CIO), Research & Ranking)

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)