Investing is simple but not easy. By avoiding certain mistakes and by following time tested strategies you can become a good investor. Mantras for becoming a good investor
1. Start Early
Albert Einstein said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” If you start investing early the power of compounding will do magic for your investment. Start investing as soon as you start earning. The power of compounding exponentially grows your wealth. Watch the below video to know what magic the power of compounding can do to your investment.
2. Choose right financial adviser/ fund manager
Financial author Robert Kiyosaki says The worst advise is the free advise. The most expensive advice you can receive is free. You should choose a qualified, experienced adviser whose integrity is beyond doubts to manage your money.
3. Make an investment plan
If you don’t know where you are going , you will probably end up somewhere else. Having the good plan is like having a road map. You will know your final destination and the best way to reach there. The plan must take into account your investment goal, time frame, risk appetite, need of liquidity, financial situation etc.
4. Calculate your risk appetite
Risk appetite varies from person to person. It depends on one’s financial status, family background, income level, health, age etc etc A high risk high return kind of investment may not be suitable for everyone. One must therefore calculate his risk ability to make sure that associated risk is not beyond capacity. Founder of two fortune 500 companies Eli Broad says I learned to embrace risk, as long as it was well thought out and in the worst case scenario, I’d still land on my feet.
5. Invest with a longer term prospective
The world most successful fund manager Peter Lynch says Time spent in the market is more important than timing the market. Another legendary investor Warren Buffet Quotes Only buy something that you would be perfectly to hold if the market shut down for 10 years.
Over the short term stock markets are very volatile and you may end up losing your money if you try to ride all the ups and downs. Investing with long term prospective is one of the safest way for wealth creation.
6. Save for rainy days
Life is full of uncertainties, emergencies can come any time. Its always wise to save money for unforeseen contingencies. Ensure that you have saved sufficient to meet the emergencies. This will help avoid need for desperate favors, borrowings or helplessness in time of crisis.
7. Invest with a margin of safety
Its not just about buying right, buying at right price matters the most. You should buy at price that incorporates margin of safety. You should asses your capacity to take loss and balance it with the risk return potential.
8. Plan for major expenses in advance
Confucius says A man who does not plan long ahead will find trouble right at his door. One should plan for major expenses such as marriage, child education, property purchase, etc Special plan should be there to cash out low liquidity assets.
9. Don’t borrow above limits
Today almost everything is available on credit. Don’t get tempted by aggressive sales tactics of lenders. Make sure that your income is adequate, not only to meet repayment obligations, but also for emergency expenses. Leaveraging for investments is a double edge sword when it works it can significantly increase the returns, but when it doesn’t it can bring a catastrophic lose.
10. Prefer cash over credit
Borrow only when you have exhausted other sources of funds. Many people park their money in low return liquid funds and borrow on much higher rate of interest on their credit cards. This doesn’t makes sense if you have money available with you avoid taking credit.
11. Plan taxes
Plan your taxes by ensuring that your investments are long term and thus attracts low tax rates. But remember putting taxes above everything else may cause you to invest in low return assets. Evading taxes can also result in criminal liability.
12. Take care of inflation
While investing never ignore inflation. Any inflation product is worth if it can beat inflation. Judge investment by real rate of return, not the nominal rate of return.
13. Diversify your investment
Its never good to put all eggs in one basket. Don’t confine all your investment to a single asset class. Allocate your money across an array of asset classes equities debt, mutual fund , real estate , gold and other commodities. Also take care that you don’t over diversify your equity portfolio.
14. Learn from mistakes
Learn from your loses, you have paid for them. Even the smartest investors makes mistakes sometimes. When you lose money, learn from mistakes and don;t repeat them again.
15. Don’t mistake luck for skills
Sometimes you can earn in stock market by investing without understanding. This is all luck not skills. Mistaking such gains for skills and repeating the same style of investment could result in huge loses. Its always good to analyse the investment whether they give profit or not.