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Advice during volatility

From the Kiplinger stable, this primer not only targets new investors but also acts as a collection of golden rules of investing for old timers, especially when the markets tank.

Tanvi Varma/Money Today        Print Edition: February 21, 2008

These days, investing in the markets is like taking a rollercoaster ride—historic highs one day and nail-biting losses the next. Add to that the increasing variety of financial products, and the need for sound financial advice seems never to have been greater. Help may be just a book away. Guide to Investing Success is a comprehensive primer on financial planning for lay investors. And for those who have been investing for some time, it’s a good revision of the basics.

Advice during volatility

Guide To Investing Success
Price: $9
Pages: 400
By Ted Miller | Published By Kaplan Publishing 

FIVE KEYS TO SUCCESS 

Make investing a habit: Develop the habit of adding something to the pot regularly and putting money where it can do the most for you

Set exciting goals: Set goals you can grab on to, goals that excite you. Instead of “financial security”, try “a million dollar net worth by 60”

Don’t take unnecessary risks: The bigger the promised reward, the bigger the risk

Keep time on your side: Understand the time value of money. A penny saved may be more or less than a penny earned depending on when it is earned and how it is saved

Diversify your investments: Diversify within investment categories. Also spread investments according to the time horizon of your goals

However, the sub-title of the book—“Making Money Today in Stocks, Bonds, Mutual Funds and Real Estate”—is somewhat misleading. The book does not focus on how to make money today. Instead, it teaches you how to carefully select investments based on your goals, irrespective of the market conditions.

As the Indian markets become more volatile, the 2006-updated version of Ted Miller’s book is a timely reminder of some golden rules of investing. The four parts of this primer guide the reader on how to start financial management and then build a portfolio based on personal goals. Part 1 is like a bible for the lay investor.

It highlights the keys to investing success (see box, 5 Keys to Success) and emphasises the importance of saving. Through anecdotal evidence and some interesting analogies, the author explains the magic of the power of compounding. Consider this: an investment of as little as $60 a month, with a 10% return would make you $500,000 in 20 years.

This part also includes simple do-it-yourself worksheets, which allow the reader to build his own balance sheet and calculate his portfolio mix. The author also recommends a range of portfolio mixes depending on an investor’s goal, monthly surplus and age. Interesting concepts like the pyramid of risk and diversification enable the reader to identify risky investments and caution him against the perils of a skewed asset allocation.

This holds true especially for a country like ours where the majority of investments are in low-return instruments. The author points out the perils of investing heavily in “safety-first” investments like savings account, where inflation and taxes eat into your earnings. These principles are explored in further detail in subsequent chapters of the book.

Part 2 explains how to build a successful portfolio and choose the right investment product for your goals. Miller goes into great detail about the basics of investing in stocks— perhaps the most confusing but most necessary instrument for wealth creation. From listing out the types of stocks to explaining the tools for analysing them, you’ll find everything here.

The 10 signs of value, like the 10 commandments of stock investing, are a bit theoretical but nonetheless applicable in any market condition. Next is a primer on bonds and mutual funds. Miller emphasises the importance of the former for balancing a portfolio. Along with a list of bonds and funds available in the US, there is also a glossary of financial jargon.

If you need to brush up on what to look for before investing in mutual funds, don’t miss this chapter. This moves on to a brief introduction on global investing followed by chapters that deal with other investments like real estate, precious metals, collectibles (not really an investment, according to Miller), and “investments you can live without” (chapter 10).

Unlike stocks and bonds, where the focus is on how to invest, these sections are about whether selected investments are suitable for you. For instance, the author does not recommend shying away from the ultra-risky futures and options or penny stocks, but certainly never to bet your children’s tuition fee on their returns.

Target audience: All investors
Quick read tip: "A smart way to buy stocks" lays down 10 signs of value to look for in stocks
Language: Easy
Style: Illustrative and academic
Visuals: Tables and charts

Parts 3 and 4 capture the basics of financial planning like goal setting and choosing a financial planner. Be it saving for a holiday, paying for a child’s college fees or funding for retirement, this section guides the reader on how to plan a portfolio as per his schedule of goals. Although lucid, some parts of the book, especially the latter sections, are not insightful to an Indian reader, considering they talk of US investment products and taxation laws.

College savings plans, 401K retirement funds, mortgage-backed securities, etc are hardly understood in India. The one striking similarity in our social fabric that directly impacts financial planning is the shift to nuclear families. In the absence of traditional support of relatives, security of returns takes on far greater importance. If you are not a patient reader, the book works well for you since the content is not chronological.

You can browse any part or chapter you are interested in. The appendix has a collection of tables and formulae, which can be used for ready reference, except that they are in US dollars. So, if you are cursing yourself for an impulsive equity investment, read this guide to get your fundamentals right.

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