Twelve simple strategies for investing success
1. Know thyself
Understanding your current financial situation and ascertaining your attitude towards risk is of paramount importance for making any investment decision. These two factors act as a guideline while establishing your financial goals and the type of investments you need to be making to achieve that goal.
2. Be practical
While setting your expectations from any investment, make a realistic estimate of the type of returns you expect. Past performance only provides an indicator of the historical returns and there is no assurance that the same would be repeated. You need to look at the following before setting any expectations:
• Long-term and short-term track record.
• Performance in different market conditions.
• Performance relative to similar types of investments.
3. Information is power
Information gives you the extra edge while making investment decisions. Ask many questions – after all, it is your hard-earned money. Make sure you have all the relevant information and have understood it before making any decision. Here are some typical questions to ask before making any investment:
• Do I have all the information?
• Is this investment legitimate
• Does the investment match my investment goal?
• What are the costs involved?
• How liquid is the investment?
4. Plan first, then invest
Make a financial plan first and then choose individual investments that fit into this plan – this is better than making investments on an ad hoc basis or by reacting to market conditions. A professional financial adviser can help you here.
5. Different investments make sense for different time horizons
Match your investments to the time horizon of your goals. For your long-term goals such as retirement or children’s education, go in for equity funds. Similarly, for short-term goals invest in money market or cash funds as they tend to be more stable and predictable.
6. Consider the effort that you are investing, besides the money
With each investment decision, recognise that varying levels of your effort and time that will be required. If you can spare four to five hours every day, and enjoy monitoring markets and equities, you could invest directly in the markets. If you can spare only one or two hours every month, then consider a mix of diversified equity, index, sector and debt funds. If you have hardly any time at all for your investments, then invest in funds of funds, which provide ready-made asset allocation plans that suit your investment needs.
7. Diversify. It pays
As different asset classes and sectors seldom move in tandem, let the ups of one make up for the downs and losses of the other by spreading your money across different types of investments.
8. Understand the risk-reward relationship
All investments have a certain amount of risk and normally the rewards are commensurate to the risk you take. For example, equity funds have the ability to provide good returns over the long term but you have to be comfortable with the ups and downs of the markets. There is no point in investing in equities and spending sleepless nights because of short-term volatility.
9. There is no right time
Trying to successfully time the markets is next to impossible. Your investment decision should be based on the careful analysis of your situation rather than market conditions. It is important to remember that any short-term volatility you might face tends to smoothe out over the long term. Investing is not a 100-metre dash, it’s a marathon.
10. Keep your emotions at bay
Emotions tend to overwhelm us whenever there is a significant shift in market conditions or when faced with unforeseen circumstances, be it good or bad. If you are making investment decisions during such situations, be even more careful.
11. Don’t be averse to taking losses
Most of us are reluctant to take losses, which means admitting to mistakes. Until you have a good reason to be optimistic about the future prospects of a loss-making investment, just sell it. We all make mistakes. The point is to learn from them.
12. Stick to your plan but review it
Before making the investment decision, evaluate how it affects your current asset allocation plan. As time passes by, your life stage changes and so do your needs as well as income. You need to periodically monitor and review your investment. After all, we invest to achieve peace of mind. Let’s not make our wrong investment decisions lose it for us.
Dhiraj Rai is the director of GEM at Franklin Templeton Investments
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Published: August 1, 2014 04:00 AM