Be a Successful Investor … “Wall Street people learn nothing and forget everything” This comment by Benjamin Graham pretty much sums up how most of us are. Most of us are generally stuck with our own ideas and philosophy… having little hunger to understand, absorb and practice new things. Most of us further believe that their way of investing is the smartest and the best in the street. But the reality may be different to what we may believe. This article focuses on how we should look at investing … and the philosophy that should ideally be followed. The successful investor is one who: • Does the needed Planning • Makes investments Systematically • Has Diversified his investments • Does regular Reviews of his investments • Does not look to time markets…Long Term Investing • Doesn’t carry too much Debt • Has Taxes in mind while investing (and spending!) Planning your Investments: Planning before hand is the best way of doing anything, let alone your investments. Financial planning is simply about achieving your goals in life through proper management of finances. Financial planning consists of the following preliminary steps: • Identifying your Goals, Commitments in life (cost, time-remaining, priority) • Understanding your present situation (savings capacity, risk tolerance) • Understanding Investment Products fulfilling the needed criteria (risk-return ratio, liquidity, feasibility) • Selection of the Investment Product best suited to you (ease, flexibility, risk-return profile, taxation) Choosing the right product becomes a very important exercise where in you try to fit in products that fit rightly into your four corners of returns, risk, horizon and comfort. Financial planning is one of the few ‘must to do’ things in life. Further, the earlier you do it the better for you. Making Systematic Investments: It is a fact that equity investments are the best form of investments from the long-term perspective. However, the markets keep fluctuating and it is very difficult, if not impossible, to time the market. So what is the best time to invest? Every time is the best time to invest – provided you are investing fixed amount at regular intervals of time. This type of investing is commonly known as Systematic Investing. SIPs or Systematic Investment Plan is one such vehicle offered by Mutual Funds. Diversifying your Investments: You must have heard of the maxim “Do not put all your investments into one basket”. This is especially true when we talk of your investments. Normally the investments should be spread across different products or schemes. This doesn’t go to mean that you diversified into avenues with unattractive riskreturn payoffs … You should invest into instruments which have the right risk-return payoffs for you in the concerned time horizon. Track and Review your investments A very important activity for us is to regularly track our investments and their performance. Regular tracking can be done on a fixed frequency of time – say 6 months, or on new developments / events in the market. The objective of such review may be to restructure your portfolio to reflect changes in your profile and/or to remove the lagging performers to be replaced with the better performing ones. Invest for long-term Many investors see investments into equities for a much shorter horizon as compared to say investments into PPF or other such products. This fundamental flaw in the perspective from a small investors’ point of view leads to him to being not as successful as he could have been had he invested for a long term horizon. The true benefit for investing into may equities or better still mutual funds is that they can potentially give you attractive returns over long-term. The true magic of compounding can only be realised if you have invested for a long term. We have to be very patience and sometimes lazy to be successful in the markets. As Warren Buffet, a very successful investor, once remarked “I do not care if the markets close for the next 10 years” Do not carry too much Debt Paying off high-cost debt is an ideal investment for anyone. The basic premise that your cost of debt should always be lower than your least returns you generate on your low performing investments, should be adhered to. Further, we should be careful of credits which incorporate compounding of interest like credit cards. However, you could take loans and postpone your cash outflows if you can generate higher returns to the interest rates over time. This way, you could end up having superior wealth with you after have paid off your loan over a horizon. Make Tax friendly planning Tax planning is one vital area where one can save a lot of amount. Proper tax planning may help you save to the extent of the maximum tax rates that you may be subjected to. In India this figure may be somewhere in the region of 33-34%, inclusive of surcharge and other levies. By properly following the above mentioned principles, we can help ourselves and our clients to create value over time. The true potential of us advisors though can only be realised if we truly understand and apply the principles of being a successful investors ourselves first
Posted on: Fri, 21 Jun 2013 08:11:58 +0000
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