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Some Dos and Don'ts of investing
Hemant Rustagi, Moneycontrol.com |
June 14, 2007 12:32 IST
Many of us delay the process of investing either for the fear of choosing the wrong investment option or thinking that we do not have enough money. First of all, it is important to know that investing is a process, not a one-time activity. Therefore, it is not necessary to have a lump sum to start investing.
Thankfully, there are smart investment options like mutual funds that not only allow you to begin your investment programme with a modest sum but also provide you the best in terms of variety, liquidity, flexibility, tax efficiency and professional management of your hard earned money.
Besides, by investing regularly over a period of time, you can build up capital as well as reduce the impact of short term volatility. Remember, investing is a very simple process that requires planning, perseverance and time.
However, if you want to be a successful investor, you need to follow certain do's and don'ts. Here are some of them:
Always plan your investments
Most investors start the process of investment without determining their investment objectives and deciding the right mix of equity and debt. There are three simple steps that can help determine an action plan. Firstly, you should make a list of personal and financial goals in the short, medium and long-term. For example, in the short term, you may want to buy a car; in the medium term you may aim to provide for children's education; and in the long run, retirement funding could be an objective.
Secondly, you need to assess your current position in the financial lifecycle. Thirdly, you must decide as to how much risk you are willing to take while investing. This is particularly important as different financial objectives require different investments.
Take help from professionals
It is quite common to see investors making wrong investment choices as they do not consult professionals. It is vital to deal with a professional and qualified advisor who has the knowledge and expertise to offer the best solutions in terms of working out investment plan as well as selecting the right investment options for you. In addition, a professional can ensure that you remain on course of achieving your investment goals. Make sure you spend time to find a right advisor for yourself before you begin investing.
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Don't allow others to take decisions on your behalf
While it is necessary to take help of professionals, it is equally important to know that you, yourself, have an important role to play in the decision making process. No one will know about your objectives, needs and risk profile better than you. While an advisor can help you in terms of determining the course of action and selection of investment options, you have a big role to play in defining the parameters.
Don't underestimate risk and/or overestimate reward
It is quite common for a lay investor to underestimate risk and/or overestimate reward from an investment. There is definitely a need to be more careful about this aspect of investing. In other words, estimating the risk associated with an investment option is more crucial than estimating the returns. Investing like many other things involve risk in order to achieve returns. By understanding investment risks and how it relates to potential returns, you can improve your chances of building greater wealth. The key factor here should be to invest as an optimist and manage risk as a pessimist.
Don't be too scared to try out new investment options
Investors, who have hitherto been investing in assured returns products like fixed deposits and small savings schemes, often refuse to look at other smart options like mutual funds just because they do not offer guaranteed returns. Though investment risk and economic uncertainties can never be eliminated, mutual funds, thanks to their mix of experience, research and analysis are in a much better position to ensure that investors in different segments achieve their investment objectives. However, to benefit from the expertise of professional fund managers, it is necessary to invest in the right type of fund i.e. the one whose objective matches with yours.
Don't try to time the stock market
There are many investors who believe that the best way to maximize returns from their equity investments is through "market timing"- a strategy in which one tries to buy before the market goes up and sell before the market goes down. Unfortunately, very few can predict the market with any degree of accuracy when, and how much, the stock prices will go up or down. In fact, it has been proven time and again that even experts find it difficult to forecast market movements consistently.
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Remember, equity is the only option that has the potential to beat inflation over a period of time. Therefore, follow a disciplined approach of investing regularly into the stock market to benefit from it.
Rebalance your portfolio from time to time
It is quite common for investors to allow the portfolio to ride on when the market is in a bullish phase. Obviously, they forget about the original mix of equity and debt and that makes their portfolio very risky. No doubt, equity market requires a long term commitment to benefit from it, however, it is equally important to book profits periodically and maintain the proper asset allocation. In other words, re-balancing, either up or down, is a necessary ingredient for the long term success. Portfolio rebalancing is a process of bringing the different asset classes back into proper relationship following a significant move in one or more.
Remember, rebalancing is more about risk than return. It is equally important to decide on a time interval, like once a year, and examine the portfolio. If the asset allocation shifts a little, there is no need to bother. If it shifts by more than 5 percent, you should rebalance. This can occur naturally over time or following an abrupt rise or decline in one or more asset classes.
Don't compromise long term goals for the short term ones
There are many investors who often lose sight of their long term objectives in order to fulfill their short term needs. While at times it may become absolutely necessary to do so, you need to remain focused on longer term goals. This can be made possible by examining various options rather than rushing to look for easier options.
The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at firstname.lastname@example.org
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