10 steps to make your money work for you

Markets always have their ups and downs. Time is the form of diversification that can profit an average investor. Successful investing involves patience and fortitude.

Mar 29, 2018 07:03 IST India Infoline News Service

Investing is all about letting your money work for you.”
 
Financial markets are a get-rich-slow scheme and not a vending machine where you insert money and immediately get something out of it. If one does not have a strategy before entering the markets, they can lose all their money at the very start, not to mention get disheartened. There isn’t any sure-shot formula that can ensure a successful investment. However, there are some rules that can help you achieve one.


 
Portfolio diversification
 
Financial markets are extremely volatile. Investment in a single type of instrument can be risky as you risk losing all your money should that investment fail. By investing in a range of vehicles, one can manage volatility more efficiently during challenging market cycles. For example, according to Strategic Advisors Inc., diversifying investments helped limit losses and capture gains during the 2008 financial crisis.
 

Long-term thinking
 
Markets will always have their ups and downs. Time is the form of diversification that can profit an average investor. Successful investing involves patience and fortitude. Longer the holding period, the more reliable growth-oriented investments become.
 
Don’t follow others
 
To beat the market, one has to be different from everybody else. Financial choices should be based on objectives, risk tolerance, and time horizon and not on what others are doing, or worse, making moves based on market panic.
 
Never try to time the market
 
Moving capital in and out of the market in expectation of corrections comes with a host of potential consequences. In the chart, the S&P 500 from 1990 to 2016 shows that the more you time the market, the lesser are your returns.


 
Know your tolerance to risk
 
One should be clear about their comfort in investing through market cycles that produce negative returns. It helps one determine the right investment strategy for them. The three most common risks that a person gets exposed to is inflation risk, market risk, and principal risk.
 
Avoid behavioral and emotional preferences
 
Do not fall prey to behavioral investing traps. One of them is anchoring, i.e. fixating the price such that the investor will not be ready to change it in a change of scenarios. Another is mental accounting, i.e. dividing wealth into arbitrary categories and making an irrational decision based on these types. It also applies to emotions. Don’t be too greedy or too fearful.
 
Invest in the business you understand
 
Never invest in the stock. Invest in the business instead, i.e. a business you understand. Before investing in a company, one should know what its business involves.

Have realistic expectations
 
It is good to expect the 'best' from investments, but you could get in to trouble if your goals are based on unrealistic expectations. It does not mean that you stop expecting. Just don’t expect the same returns. As Warren Buffett has said, "Earning more than 12% in stock is pure dumb luck and you laugh at it, you are surely inviting trouble for yourself."
 
Monitor rigorously
 
Keep monitoring events that would possibly affect your investments. If you do not seem to have enough knowledge, take the help of a financial planner.
 
Finally, be flexible
 
Be flexible with your investment choices. Don’t be too dogmatic. The world is constantly moving, and these changes can drive an investment towards success or failure. Keep going with the flow and learn continuously.

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