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Importance of timing your investments through rule-based mechanisms

by Prabhakar Tiwari (Chief Growth Officer, Angel One Ltd)
Dec 02, 2021
Importance of timing your investments through rule-based mechanisms, Market, KonexioNetwork.com

 Millennials are constantly looking for different avenues to park their money and capital markets has emerged as an important avenue for their investments. However, investors often find it challenging to choose the best stock or portfolio to invest in because of the lack of knowledge about the market. At times, investment decisions appear to be straightforward, based on the market trend analysis. On the other hand, there could be some stocks and scrips that outperform the market returns comprehensively. Therefore for Millennials, who have started stock market investment recently, this could be pretty confusing, and hence while interested they could be hesitant while putting money in different securities.   

Thus, GenZ and Millennials are often looking for a piece of advice related to the future of stock before investing. Analysts have traditionally provided such advice based on fundamental and technical studies and outlooks regarding a company, market, or policy announcement. Such advice can be fruitful or adverse, based on the actual market outcome. Human bias is a crucial factor in influencing investment decisions; hence any investment based on ‘advice’ sought from analysts or experts could be profitable in some cases and losses in others.

With the advent of technology, there is another way of stock analysis that eliminates the probability of human error and judgment in selecting investment options which is through data driven rules. Hence, young investors can place their investment decisions on information provided by a reliable and efficient mechanism like a rule-based investment, a data-driven program run on algorithms and not emotions.

What is a rule-based investment mechanism?

Rule-based investment mechanism is not an entirely new concept. Old-time investors have used this method for years. They would take account of all updates in the market in the form of company returns, corporate actions, flash news, policy decisions (by the government) etc., and accordingly make a ‘rule’ based on which they would make investments.

However, with algorithms, artificial intelligence, and predictive modelling, the rule-based mechanism has evolved in the past few years. These rule-based programs are based on large volumes of data processed by sophisticated systems (and not possible to be processed by a human mind). This rule-based mechanism functions on the investors' risk-taking capabilities and accordingly comes up with the best advice which investors can use for their investments.

The smart beta investment strategy

Based on the rule-based mechanism, these programs have developed a new concept called smart beta investment strategy. This strategy is mainly popular in developed markets and economies. These smart beta strategies aim to enhance returns, improve diversification, and reduce risk by investing in customized indexes or ETFs based on one or more predetermined factors. The aim here is to outperform bellwether indices and manage the overall risk level that the investor is willing to undertake. Since the traditional indices are capitalization-weighted, companies with a higher market capitalization would dominate a given index. However, smart beta investment strategies can take account of various market and company-based indicators and based on such factors, portfolio creation is facilitated. Furthermore, it helps remove any chances of human bias in the investment decision, thereby increasing the overall probability to earn profits. The traditional methodology of choosing stocks is therefore replaced with data-driven approach.

Stock market investments could be pretty fulfilling if an investor takes an informed decision. Even though the advice given by experts and analysts could be beneficial, it is still a historical way of identifying stocks.  The rule-based trading and investment mechanism helps in making more informed decisions than ever. Hence, introducing a rule-based investment mechanism wherein sophisticated programs use algorithms and data analytics has worked wonders for investors. The advice provided by such platforms is free from human bias that eventually helps in profitable investment decisions.