Like a plant that needs time to bear fruit, your investments will also need time to grow. But, of course, this is possible only if you plant the sapling. Once you do so, you need to nurture it by providing water, ensuring ample sunlight, digging the soil and removing the weeds. Similarly, you need infinite patience when it comes to your investments. You will have to regularly review your portfolio, rejig it to suit your goals and get rid of non-performing stocks and funds. The earlier you start, the more you benefit because of the power of compounding. Here are five steps that can help you create wealth in the long run.
Pay yourself first
At the beginning of the month, learn to 'pay yourself first'. Every month, you take out money for house rent, groceries, school fees, car EMI, etc, from your salary. Now, start taking out a fixed amount for yourself and invest it in equity mutual funds through the systematic investment plan (SIP). If you're worried about arranging the money, start small. Begin with Rs 500 a month and slowly increase it to a more substantial amount. This will not only make you financially disciplined but will also create a huge amount of wealth without subjecting yourself to too many monetary constraints. Investing through SIPs also ensures that you don't have to worry unduly about market volatility.
Prepare a plan
The starting point for any successful investing is to prepare a plan that helps identify your objectives, goals, the time horizon for each goal and the means available. Just as one prepares a monthly budget to specify the household earning, the surplus available, gaps in meeting expenses and the purchases that can be postponed, one also needs to make a plan outlining the steps to fulfill one's objectives.
Only with a plan will you be able to pinpoint the goals that are realistically achievable and the ones that are not. To reach some of these future targets, you may have to sacrifice a few of your current needs and luxuries. For instance, if you are planning to buy a house, you may realise that your current savings are not enough and that you will need to cut down on spending, perhaps, on your telephone bill or petrol expenses. To be able to see the larger picture, you will first have to make a detailed blueprint. Once this is done, you should review the plan at least once a month. We spend almost 12 hours a day at work to be able to earn, so why can't we spend one hour a month to review the status of our hard-earned money?
Avoid acting on tips
Go over all the investments that you have made in the past five years and calculate the profit and loss in your portfolio. Focus on the investments that you have made on the basis of tips shared by a friend, acquaintance or a relative. The result, in most cases, will be net loss. It will do our portfolios a world of good if we ignore tips from all and sundry. Unfortunately, people are in the habit of seeking advice from anybody who is associated with stock markets, no matter how tenuously. Consider this: if the tipper was so convinced about the stock or fund, he would not be sharing it with the world. He would, most probably, be too busy counting the stacks of money he would have earned as profit.
If you need advice on financial planning, approach a certified planner and check his credentials. Otherwise, invest in funds, where a fund manager, who understands the stock market better than you, will handle your money. However, even experts can fail to predict the market direction. So, don't wash your hands off your investment after entrusting it to an expert. Keep abreast of financial news, conduct your own research and go through the quarterly reports of companies.
Lure of historic returns
Our decision to invest in any asset class is based mostly on the returns that it has delivered in the previous years. We are so blinded by past performance that we tend to ignore other factors, such as the quality of portfolio, consistency of performance, extra risk taken to generate higher returns and the track record of the asset management company. Remember, there is no such thing as a free lunch. So, if a mutual fund scheme is generating returns higher than its peer average and is beating it by a huge margin, you need to dig deep and find the reasons for its spectacular performance. You will have to question whether the portfolio has a concentrated exposure to a few stocks, whether these stocks will be able to withstand tough times, if the returns are sustainable over the long term, etc.
Generally, a stock or fund that promises high returns also carries high risk. You will have to take into account the risk factor of the investment option before adding it to your portfolio. So, understand your own risk-taking capacity. If you have a longer investment horizon, you can afford to take more risks as these will be balanced out in the long run. This is why young investors are advised to buy more equities, while those nearing retirement should concentrate on safer instruments, such as the Public Provident Fund and the National Savings Certificate.
Don't react to market swings
Before you begin putting your money in an instrument, decide whether you want to be an investor or a speculator. Usually, investors have a long-term view, while speculators are more concerned with short-term market movements. Though most of us consider ourselves to be investors, we tend to be perturbed by the tiniest of swings in the market. Don't over-react to market cycles. Bull runs and bear markets always follow each other.
Don't worry if a particular index is suddenly zooming up, while another is in the doldrums. Indices are only a barometer of the stock market and do not represent the entire market. Once you have done your homework before investing in an equity mutual fund or stock, you need to have a lot of patience to get your reward. If we let our greed and fear control us, chances are we will always sell when the prices are down and buy when they are moving up. Ideally, we should be doing the reverse. Avoid following the herd mentality and follow the advice of investor guru Warren Buffett: be fearful when others are greedy, and be greedy when others are fearful.
Lokesh Nathany is Senior Vice-President, Sales and Distribution, Motilal Oswal AMC
