New to investing? – focus on these six simple but significant aspects

There is a fair chance that this statement is part of New Year resolution for many of us -‘I will start investing from the coming financial year’. For some, this statement might have been appearing continuously in the priority list for last few years but has not really been implemented upon, as yet.

There will be people who would impress you with their investing skills. But remember that fortunes are made more with time and patience than with taking risky bets over the short period of time.

Warren Buffett sums this up emphatically – “You only have to do a very few things right in your life so long as you don’t do too many things wrong”

A few things which appear simple yet are significant and can make a marked difference to your investment journey, are:

1 Understand and stick to asset allocation              this is the fundamental of portfolio construction. Simply put, we have to choose from broadly three categories – 1) Cash (savings & bank deposits), 2) Fixed income assets and 3) Equities. (Some include gold and real estate as well-which needs a separate discussion)

Asset allocation should be aligned with the investment goals and objectives. It takes care of primarily all aspects from an investor’s perspective- risk management, volatility, profit and loss and return expectation from individual asset classes as well as the overall portfolio.

2 Calculate returns/performance for investments                           I am yet to come across an investor who calculates annual performance of all of his/her investments. My standard is April 1-March 31 as it fits well with the annual taxation exercise. For some investments, even January 1- December 31 works fine. (I use it for some of the market related investments)

Periodical reviews are suggested. However, once in a year is definitely recommended. If you understand measuring a particular asset class against a benchmark, that will be all the more helpful.

3 Invest with a timeframe in mind            anything that we buy should be researched well. We should have clarity of purpose and a plan in mind. The plan should envisage the ups and downs and a strategy which would define “if this happens, then I will sell this” or ‘if this target is breached/achieved, I will sell or add more”.

As soon as we buy a product, we become increasingly irrational and emotionally attached. Thus, before buying a product, a minimum and maximum timeframe and a clear thought out strategy to sell versus staying invested helps. This becomes easier when, as mentioned above, investments are aligned with goals.

4 Enhance your savings rate        Inflation has been and will remain the greatest hindrance to wealth creation. We cannot wish it away. Tweaking and making changes to the asset allocation periodically, helps. However, a marked improvement to the portfolio returns can be effected upon by gradually increasing the year on year savings rate.

Let us take an example-suppose you started working in 2012 and were saving INR 3000 per month which was 10% of your monthly salary of INR 30,000. You would think that you have done a good job by continuing with it till date. However, today after a job switch and with INR 1, 20,000 as your monthly salary, INR 3000 means a savings rate of just 2.5%!

It is important to note that even a 10% addition in the yearly savings allocation can add a few basis points to the overall portfolio returns.

5 Say no to instant gratification   your future would be secure if you earn and invest well, today. Compounding works well when you start early and let your money grow. That means you have to let go of certain comforts today for future security and comfort. When you feel the urge for buying something, take the one month challenge. If on the 30th day, you still feel the need to buy the product, buy it.

Do not buy any financial product in the January – March season just for tax savings. In most cases, these turn out to be more of liabilities. Think long term and let go of short term traps. When it comes to money, remember that there is no return which is “here and now”.

The American business magnate Thomas Boon Pickens has saidThe older I get, the more I see a straight path where I want to go. If you’re going to hunt elephants, don’t get off the trail for a rabbit.”

6 Sphere of control                         Let us get this straight –there are certain factors which would never be under our control. Fiscal deficit, trade wars, oil and gold prices and central bank policies – these and the like are all beyond our control and would always remain so. Very few understand these terms and their implication on the economy, markets and trade.

The  focus should be on things that are under our control like starting early,  enhancing the savings rate, generating passive income sources, investing in compounding assets, etc.

Investing in developing financial knowledge is a sound investment that is under our control and can yield great returns in the long term.


2 thoughts on “New to investing? – focus on these six simple but significant aspects

  1. I really liked the practical solution of Instant gratification and taking 30 days challenge. Once again great article. Lots of Financial wisdom in it. Thanks for writting.


  2. Nice article sir. Specially point number 5. I do agree as have seen many investing for the sake of tax saving and that too between Jan to March


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