Principles and decision-making for wealth creation

The magic formula for creating long term wealth is “Sound Investment Principles + Right Investment Decisions = Long Term Wealth”.

October 14, 2013 11:24 IST | India Infoline News Service

Whenever people have surplus money, they want to invest. When they invest, they just want to act or execute. They don’t want to spend time on understanding the product and various investment strategies. They would like to take investment decisions without doing any homework. There is no plan of action. Their attitude is “I have surplus money; just tell me where to invest”.

Misselling: These kinds of investment decision making will make you fall prey for misselling. As you are not interested in doing the homework and if someone comes with a long chart and calculations for 20 years, then you may find it interesting and end up buying products like ULIPs.  When you realize that you have invested in a mediocre product, you will blame the agent or broker and not yourself and your wrong decision making approach.

Market Moods: When you just want to act, your investment decisions will swing based on the market moods. If the stock markets are highly volatile and it is comes down day by day then you may think that instead of investing in stock market investing in debt funds are fixed deposits are safe and wise. If the stock market goes up and everyone is investing in the market including your driver, then you may think it is opt to invest in shares or equity funds. So in this case you will never buy low and sell high. In fact you end up buying at peak and avoiding the market when the share prices are low.

Aggressive Trading: Blindly, some investors believe that by doing aggressive trades in shares and derivatives are the quick way to make money in the stock market. They enjoy their higher degree of involvement with the stock market. They feel very happy about the few successes in the stock market which give them comfort in accepting many losses. They don’t go back and calculate how much they have made or lost in a trade; what is the total profit or loss they have made in a particular year. These investors will learn very old lessons of investment after losing a huge amount of their hard earned money.

Wealth Creation Secret: The mistake investors do is they don’t understand the basic investment principles. They simply try to make some investment decisions. How can these investment decisions be right? Very difficult. As an investor, you need to understand the investment principles. Then based on the investment principles, you need to take the investment decisions. These investment decisions will be right for sure. Without right investment principles, right investment decisions become impossible. Without right investment decisions, long term wealth creation is just a day dream.

Sound Investment Principles:

Asset Allocation: Depending upon your financial goals, you need to arrive at the required rate of return from your investments. You need to decide what kind of allocation needs to be given to different kind of investment avenues (like FD, Debt funds, Equity Funds, Gold ETF) in order to achieve the required rate of return. Once decided, don’t change this asset allocation ratio depending upon the market movement.

Risk Vs Safety: Whatever the long term savings you have got you can invest in risky assets like equity funds. You will be adequately rewarded for taking risk in the long run. Whatever the short term savings you have got you can park it in FDs or debt funds.

Investing your long term money in safe avenues will be a destruction to create long term wealth. You will not be able to beat inflation. Similarly investing your short term money in risky investments is also dangerous.

Fundamental Factors: The returns an investment generates will be based on its fundamental factors. Analysing fundamental factors only will lead to a long term success. There is a lot of difference between taking one right investment decision by fluke and taking right investment decisions regularly by analyzing the fundamental factors.

These investment principles are very simple and straight forward. At the same time these principles are very authentic and profound. The magic formula for creating long term wealth is “Sound Investment Principles + Right Investment Decisions = Long Term Wealth”.

The writer is the chief financial planner at Holistic Investment Planners

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