Investments can either make you or break you. Here are some simple tips to help you become a better investor.
Investments can either make you or break you. Stringent discipline is the key to making fruitful investments that won’t disappoint. Basically, stick to long-term investments, have a strong strategy in place and be ready to take risks. This will help you invest better and grow your wealth.
Apart from the quick tips mentioned above, with the constant shifts in the current investment market, you need to have realistic expectations when it comes to returns, understand that individual asset classes are subject to volatility and that there will be unstable correlations.
Additional Reading: Understanding `Systematic Investment Plan’ (SIP)!
So, without further ado, here are some simple steps to help you become a better investor:
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Outline your investment philosophy
By investment philosophy, we refer to a set of individual beliefs or principles on the basis of which you will be developing all your investment strategies. These sets of beliefs or principles will guide all your actions related to your investment portfolio.
Therefore, it is important for you to frame your investment philosophy much before you start considering any investment strategy. Ensure that this philosophy is the basis for all your long-term investment plans and procedures. Also, make sure that your investment philosophy is based on sound expectations and assumptions.
Additional Reading: Systematic Investment Plan Basics
So, what should be included in your investment philosophy? If you want to become a pro-investor, then you need to define time horizons for each of your investments, decide which assets you plan on investing in, and how you plan on responding to market volatility without straying away from your investment principles.
If you successfully set up a solid long-term investment philosophy, then it is less likely that you will stray off track to blindly chase new trends in the market.
Your investment philosophy doesn’t need to be long or elaborate. Keeping it short and concise is the way to go. For example, you can have investment philosophies like ‘buy-and-hold’, ‘diversify widely’, ‘long-term’, etc.
Here are some pointers to consider if you’re framing an investment philosophy for the first time. These will help you develop a practical and strong philosophy.
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Core Beliefs
Your core beliefs are what determines the reason behind your investment decision and the purpose of your investments.
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Time Horizon
As an investor, we’re bound to maintain a long-term outlook for each of our investments. However, if you want to frame a sound investment philosophy, you will need to outline a time frame for each of your investments.
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Your Risk Appetite
How much risk can you take? With investments, you need to take risks if you want to increase your expected returns. In your philosophy, you need to clearly define the amount of risk you are willing to take.
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Diversification
Asset allocation and diversification are important elements of any investment portfolio. You will need to define your core beliefs and philosophy based on these. Asset allocation and portfolio diversification will help you prepare strategies for investment.
Additional Reading: Tips For Ideal Portfolio Diversification
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Outline your investment strategy
Once you have prepared your investment philosophy, it is time for you to prepare your strategy. When defining your investment strategy, it is important to be disciplined. Your strategies need to be grounded. However, this doesn’t mean that you can’t develop new strategies for any new goals. You can do so, but make sure that you incorporate these into your main investment plan.
While outlining your strategy, you’ll need to consider the following:
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Time Frame
Most of us usually invest keeping retirement in mind. But, what about after that? You really don’t have to wind up your investments after retirement. Instead, you should keep investing beyond that especially if you have been saving for your kids or grandkids.
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Asset Allocation
When you’re creating your investment strategy, you need to clearly define what assets you want to invest in. Remember that proper asset allocation requires a balance between risk and reward based on your goals, time frame and risk appetite.
Some of the known asset allocation strategies are strategic asset allocation, constant-weighting asset allocation, tactical asset allocation, dynamic asset allocation, insured asset allocation and integrated asset allocation.
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Risks vs Rewards
It is very important for every investor to understand their risk tolerance. You need to prepare your investment strategy based on this tolerance. If you are a low-risk kind of investor, it is better for you to stick to less risky investments like Fixed Deposits and Debt Funds.
In comparison, high-risk takers can devote a high percentage of their portfolio to equities. Whatever your risk appetite is, just stick to your limits.
Additional Reading: Why Debt Mutual Funds Are Better Than Fixed Deposits?
Even the most successful investors find it hard to beat the markets all the time. When the markets are up, we often tend to shoot for the stars, while we stray away when the markets are down.
But, if you want to invest like a pro, you need to focus on your set strategy and stay on track without deviating from your investment goals.
If you’re looking to grow your wealth over time, then give Mutual Funds a shot.