Warren Buffet called investments to be a second source of income. Times may have changed and we may like to call ourselves modern but we still earn the traditional way i.e. from one pay cheque to another. We usually treat our monthly income as the only source of income and the investments gets treated as expenses. It is this viewpoint of investors that discourages them from investing. Investing is rarely seen as a means of utilizing present income to generate future income. It is this fundamental change in mindset that needs to be brought about for an individual to become not just another investor but a successful investor.
In a two part series we will discuss these 12 rules.
Do Your Groundwork
In school when you failed to do your homework you not only got a scolding from your teachers you also felt like you are falling behind your class. You will be flooded by the same feelings if you don’t do your groundwork while going to make your investments. This time there will be no teachers to scold you but only your costly mistakes to show for your lack of investing knowledge. Hence, while are you deciding upon your investments you are deciding upon the kind of financial future you want to build. Groundwork merely refers to basic knowledge and information about the products you are considering for investments. The relevant information is available on every Asset Management Company’s (AMC) and Insurance Company’s website or respective product websites. Alternatively, by availing the services of a qualified and experienced financial advisor you may gain the knowledge to start the groundwork. Such knowledge will ensure that you do not fall prey to speculations or rumours. There is a very simple saying in the investing world, if you do not know what it is then do not invest. Hence, the groundwork ensures you know what your steeping into and the possible pros and cons that you may have to face.
There is No Free Lunch
There is no such thing as a free lunch and there is no such thing as free financial advice. It is human nature to not value things that are free. You pay for the services of a doctor, driver and plumber. So why not pay for the services of a financial adviser? Financial adviser is one such person who has expertise and knowledge in the field of finance. They understand the needs of the investor and provide customized solutions to the needs of the investor. In return they charge a nominal fee from the investors on the basis of the services provided. Making a portfolio is not enough, you have to be able to keep a watch on it and rebalance as and when your needs change. It may not always be possible for us to keep a watch. A financial advisor could do that for us and make recommendations for rebalancing as the need may arise. Hence, you get personalized services and expert advice for a nominal fee. You still want the free lunch or a good meal at a nominal price?
Know Yourself Better
Every human being is different from the other and no two investors are alike. While some like to go all out and invest in equities without the fear of the looming risks. Some like to take it slow and invest in a fixed deposit and Public provident Fund. Some try to strike a balance between debts and equities. You have to figure out what kind of an investor you are. Not everyone has the same capacity to take risks, maybe you like it low. It is alright to want to stay in your comfort zone. However, if you have an ambitious set of goals to fulfill then you will also have to push yourself out of that comfort zone. If you are comfortable taking moderate risk but you have pushed yourself to take high risk by investing in equities it might leave you in a bad place. You will panic with the minor fluctuations in the market and may hurriedly withdraw your funds because your fear losses. Since you were not aware of your investing habits and attitudes your savings and investments will suffer. Hence, know yourself a little better and while being aware do not forget to push yourself out of the comfort zone if the goal demands so.
It is All About Priorities
If you are ever asked about things that matter, you will probably state work and/or family. The reason being you like them, they motivate you and give you a sense of purpose. Your work defines you financially and your family defines you emotionally. It is because they have become such a close knit of how you define yourself, they have become priorities. To become a successful investor, you will have to involve yourself in the process of investing. You need to make investments one of your priorities. There is a simple saying which states that investments are your second source of income. It is the process of utilizing your present income to generate future income. So something that plays such an important role and could impact your future needs to be higher up on your priority list. Investors usually have the tendency to treat investments as a burden and secondary to spending. This is the first step towards failure in investments. You will be able to prioritize your investments only if you prioritize your financial future.
Influence of Inflation
If you want to be a successful investor you have to get ahead of factors that could potentially bring your investments down. Inflation is one such primary factor that could adversely affect your investments. Have you heard of the idea of ‘Swim’? The idea states that no matter what happens humans rather keep swimming than sink. The idea is to be able to stay afloat to move on. Well, inflation around you still has to make your investments swim and not let them sink because of the heavy inflationary tides. To stay ahead of inflation you always have to assume that the inflation will keep on increasing with every financial year. Hence, the present cost will higher when determined in futuristic terms. The sum that is enough to manage your household expenses is going to exponentially rise in the future! So if you think in the future the inflation is going to be 8% start investing assuming inflation will be 9%. This will ensure that you always stay afloat no matter how strong the inflationary tides are.
Stop Being Bothered About the Markets
We often tend to panic due to minor fluctuations in the market. We are aware of the fact that we have invested in equities and you find it difficult to do away all the myths and speculations that exist regarding equity investments. So while you are keeping a hawk eye on your portfolio, watch out for any major fall in the markets. However, minor fluctuations in a big economy are nothing to panic about. Investors often try to time the market and that is a foolish mistake. Even experts fail to time the market because they are volatile unless you are considering investments for a long period of time. A lot of times investors panic because of minor fluctuations and withdraw equity investments. It is a widely known fact that equities are risky but the risk is negated if the investments are left for a long period of time. The aim of investments is to ensure that you can generate maximum possible returns. If you are constantly investing and withdrawing then you are losing out on the generation of returns. So do not let your preconceived notions get the better of you as you may risk not fulfilling your goals.
If somebody ever comes and tells you that he or she knows about all the rules to make you a successful investor they are bluffing you. As you may have realized the rules mentioned above often border on common sense. While we may know it all or it exists in the clutter of memory we often tend to forget or ignore the basics. Writing it down or reading it gives a nice jog to remind ourselves that successful investing is no rocket science and rather simple. So you may have already swam a long way and the goals look closer, you have to channelize your investments so that you can make it on shore at the quickest possible time. Now that you know the rules I guess it is time to start.
Watch for the part 2 of the article tomorrow