Yesterday we discussed the first 6 rules in the Part 1 of the article 12 Rules for Investing Successfully. Here is the 2nd part.
In ‘Rules of Investment Success-I’ you read about all the steps that you must take as an investor while you are about to make an investment. Once you have started walking along the investment path you are feeling a certain bit self assured with all your investment choices. The feeling that success is inevitable because of the portfolio you have designed and soon enough returns will start rolling in. Slowly but surely the investments start to fade from your mind because you are growing too secure about it. In this state of complacency you will constantly ignore the crucial rebalancing that the portfolio requires. Investments are like a machine; just making it run is not enough, you also have to keep oiling it to get best results. The idea is not only to get a smooth start and making the right choices while you walk down this path. It is also to make sure that you maintain the rhythm of your investment. Starting out is often easy enough but sticking to your investments and making them work is difficult. Hence, let us see how you can stay invested and make your investments a success.
Get your Asset Allocation right
Asset allocation determines the returns of your portfolio. Hence, getting the right asset allocation could be also be termed as successful investment. The key factors upon which the asset allocation rests are your risk appetite, your current age and the investment horizon. Determining these three, financial planners and advisers adjust your portfolio to provide the right mix of asset allocation. A young investor in his 20s or 30s will be advised to aggressively invest in equities as they have an investment horizon of 30 to 40 years. An older investor in his 40s or 50s will be advised to incline towards balanced and debt investments as he needs capital protection with moderate returns and not expose it to the volatility of equities. It is commonly said not to put all your eggs in one basket and asset allocation ensures just that. To have a more comprehensive view on Asset Allocation, we suggest reading – Optimize your asset allocation with mutual funds
Be focused on your long term goals
Long term goals are usually defined as goals which would be fulfilled in at least 10 to 15 years or more from present time. Long term goals are a double edged sword because while you have time by your side you also have the inflation slowly creeping in and exponentially increasing the future prices. The portfolios of investors are often determined by the personal long term goals and they form the core component of investment. During the investment years there will be few short term goals which require your immediate attention. But, do not compromise on the funds of the long term goals to fulfill short term goals. This is not because you cannot compensate later, you may add extra funds but what you lose is time and the time value of money. Hence, focusing on long term goals should be an investment priority
Rebalancing Your Portfolio
It is often said that it is not how much you invest that determines the success of your portfolio. Rather the asset classes that you pick for investment and the weightage you give to every asset class is what determines your portfolio profit. Hence, if you are being rigid about your investments and unwilling to face change then your investments are in trouble. For example you have extra funds which are lying idle. It should ideally be invested but are hesitant because it will spoil your portfolio. However, the need for rebalancing arises here. The choice you might have to make is whether you will invest the fund in one asset class like equities or distribute it among two or more asset classes like debts and fixed deposits.
The need for rebalancing also arises when there is a change in your personal goals. When a goal gets fulfilled you need to start saving and investing for some other goals depending upon which goal is next in the line of importance. If the goal of your child’s education has been fulfilled then the next goal is retirement. Hence, you rebalance your portfolio by channelizing the investment or monthly SIP payments to the retirement corpus. The rebalancing plays a crucial role and this allows you to focus on the important goals and pursue them single mindedly.
Listen to Your Financial Advisor
Your portfolio by and large is managed by your financial advisor. Your financial advisor with whom you may have also developed camaraderie has become your well wisher. You continue the professional relationships as well as you pay a fixed fee or a percentage of your profits to your advisor. They usually take a keen interest in the happenings of a portfolio with your best interest in mind. It is important that you keep paying heed to your advisor and what he is saying. You may have often heard that an advisor may give you advice but as an investor you always have to make the final call whether you want to go ahead with your advisor’s opinion. A lot of times we ignore out advisors call to rebalance or review the portfolio. We tend to become complacent with our investments. Advisors then become the nudge that we need to get up and take notice. While you may do your groundwork to be able to make a decision, an advisor has detailed knowledge and experience of the same product. Hence, it does not harm to let his knowledge influence your decision. So listen to your financial advisor and the chances are you will gain and keep gaining.
There is no simpler way to become a successful investor than to keep investing. If there is a constant flow of funds for investments in your already existing investments then it becomes a means of asserting your discipline and priority. Investor who make investments and forgets about it rarely become successful investors. You may not always have to invest big amount, small pockets of money are enough to make you a disciplined investor.
If you keep investing you always ensure you have extra savings and this keeps you secure from any major investment failure. You can also use the extra fund as emergency funds or make up for any underfunded goals. While it is mandatory to have goal driven investments it is also beneficial to have surplus investments without any specific purpose. Instead of letting your savings lie around, idly utilize it. The more investments are added to existing portfolio, the closer you come to your goal of successful investing. For example - Through Systematic Investment Planning (SIP) you can invest an amount as small as Rs 500 and let us see how the small pockets of money could have in the long run.
Source: https://www.advisorkhoj.com/tools-and-calculators/sip-calculator (SIP returns assumed @12.50%)
Reinvest Your Profits
It has been a while since you started investing and you understand the ball game of investing. Maybe you have also generated hefty profits on your portfolio and have the overwhelming feeling of having become a successful investor. This is where you need to consider the way forward with the profits. Are you going to merely spend it? Here is an idea. Your returns are largely a result of compounding. So you do compounding of compounding. Take the already compounded returns and invest them again for compounding. Hence, you keep reaping benefits of compounding even on compounded returns. The chances are you will already have utilized the corpus for the fulfilment of the goals. However, investments often exceed our expectations and we are left with funds after the goal has been fulfilled. So rather than blowing out the extra money, utilize it in fresh investments or add in the already existing portfolio. Profits are an unexpected source of income but should be treated like incomes nonetheless i.e. utilize some for investments and some for spending. This is financially called as snowball because you keep investing profits and the profits of profits. Hence, even the smallest surplus in the investing stream keeps compounding and generating returns.
There is a very thin line between a successful investor and a failed investor and as investor you are always walking the thin line. Keeping a track of your investments and watching your portfolio in itself could be a full time engaging task. The success of your investments depends either on your personal involvement and attention or the attention and involvement of a financial advisor on your behalf. So go on this journey and become a successful investor!