Moneycontrol
Feb 06, 2018 10:27 AM IST | Source: Moneycontrol.com

A beginner’s guide to investing: Four building blocks to succeed

It would be nearly impossible to be successful in the field without these four building blocks of investment.


Aniruddha Meher

“If past history was all there was to the game, the richest people would be librarians.”

– Warren Buffett

Investing, particularly investing well, is not the easiest game in the world. It requires a multitude of virtues like patience, keeping faith in your investment and the important ability to admit it when a mistake has been made. Even the doyen of investing Warren Buffett admitted he made a mistake about his Berkshire stock saying

“I've made lots of dumb decisions. That's part of the game.”

There are a few basics that are vital to hold on to while investing. So much so, we believe it would be nearly impossible to be successful in the field without these four building blocks of investment.

1. Set the right goals

Before investing any money, it is absolutely vital that your goals are clearly defined. There are many different approaches to setting these goals. Ask yourself a few questions.

• Is your ultimate goal to simply preserve your capital and to grow it at above inflation (and risk) adjusted returns over a long period of time?
• Or do you prefer quick turnaround times bearing in mind that it might ultimately be high risk?
• What is your tolerance for risk?
• What do you want to achieve over the short term and what are your long term plans?

• How much time will you have to devote to your portfolio?

Defining these goals will ultimately decide the asset allocation along with buy and sell strategies for your portfolio. It is also important to remember that your goals are not hard and fast and can change if necessary. However, it is best to define them as clearly as possible so an overall strategy can be defined.

2. Don’t panic

Sudden bubbles and busts have often left investors paranoid and in a panic. Behavioral biases are often at their strongest in such cases. Many investors are guided by external cues like news coming through the papers, TV channels or simply by word of mouth. Fear and greed are two major contributors to panic in the market. Optimism forms market peaks and pessimism forms market bottoms.

It might be easier said than done but you must have faith in your investment strategy and stay calm. After all, there are bargains to be had at when the market hits the bottom!

The same can be said about selling when stocks are low. Fear can drive an investor to rid himself of his equities. Staying rational during market highs and lows is the best way to minimize the risks of behavioral biases while investing.

In short, you must accept that markets are volatile creatures and it is important to stay calm and use the volatility to your advantage.

3. Allocate assets wisely

Diversify your portfolio by investing in diverse asset classes as hedges against inflationary and deflationary environments. Ensure that you invest in the highest quality spectrum of different asset classes. For example, when investing in equities you should look at strong businesses preferably with sustainable barriers to entry and when investing in debt, you should invest in debt of those companies that are preferably backed by the government and which are providing a necessary service e.g. utilities. Gold works as a high quality cash reserve. This strategy helps mitigate the various risks facing a portfolio over the long term.

Apart from under diversification, another big no is over diversification which can actually work against you and decrease your chances of getting good returns. A well balanced portfolio will have the ability to maintain the purchasing power of a portfolio through any economic environment while providing good returns over the long run.

4. Hire a proficient financial advisor

Don’t assume you can do it all yourself. Successful investing comprises of numerous different factors and variables. While it might look easy to navigate the market in times of prosperity, it becomes difficult to avoid emotional and behavioral biases when things are bad.

Good investment advisors are individuals who are trained to remain rational through all of Mr. Market’s mood swings thereby avoiding impulsive decisions that could prove to be detrimental to your portfolio in the long run. Hiring a wealth manager who understands your goals can bring in fresh expertise and go a long way toward increasing your returns.

Common perception deems investing to be a gamble where you can ‘get lucky and strike it rich’ while it actually involves taking a series of calculated risks based on careful research. Preserving and growing your capital requires discipline and sticking to a few basic rules will ensure that you meet your investment goals in the long run. And remember to always ask a professional for help when you are in doubt.

(The writer is fund manager of Sankhya India Portfolio at Multi-Act India)
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