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Should you follow norms of investing?

Only if they offer expected, high returns. Occasionally, it pays more to follow your own rationality and adopt a different approach. Here are some contrarian strategies that can result in more gains.

P V Subramanyam | Print Edition: December 2010

How often have you followed investing principles to the hilt only to fall short of expected returns? How many times have you imbibed investing logic to rue over its failure?

While rules decidedly set you on the road to success, it's foolhardy to snub your own rationality. Often, our hard-earned money fails to multiply at the rate we want because of the knowledge base we have built over the years and our blinkered approach to investing.

Sometimes, adopting a different approach to the norm can be more profitable. Here are some strategies that are contrarian to the ones popularly espoused. These can work for you, but keep in mind that just as with other strategies, these too require study and due diligence.

Concentrate on your portfolio: Most readers think of portfolio diversification as a wealth creation technique. Actually, it's a risk reduction tool utilised to preserve wealth.

This doesn't diminish its importance. In fact, diversification is essential. However, some of the largest fortunes in the world have been created by 'focused' investing. Azim Premji, Ratan Tata and Bill Gates have all increased wealth by concentrating their funds, not by diversifying them.

So, if your portfolio is doing well, it's a good reason to buy more stocks of the companies that you own. Suppose you had bought 100 shares of Tata Power in 1995, the consistent performance of the company can be an incentive to add more of the same.

Ignore some rules: Most finance students have been taught the '100 minus age' thumb rule to calculate the amount that should be invested in equities. However, aggressive investors often ignore it. They usually have a set percentage of debt amount in their portfolios.

 

"Ignore the '100 minus age' rule to know how much to put in equity. Instead, earmark a certain percentage for debt and then invest heavily in equities"
Though they keep putting in small amounts and rebalancing their portfolios to maintain this figure, they invest heavily in equities. For instance, an investor can put an amount equivalent to his expenses for the next 10 years in debt instruments. Any money invested after this can be routed to the stock market.

Get rid of niche plans: Specific policies, such as child plans, pension plans, etc, are, at best, sub-optimal. For instance, if you want to build a corpus for your child's higher education, instead of putting money in a child plan from ICICI Prudential Asset Management Company, invest it in the ICICI Prudential Dynamic fund, which will deliver better returns.

Get an adviser: This is probably the most important investing approach you can adopt. Many people believe that taking financial advice from parents is enough. It's also natural as we've turned to them for their opinion throughout our lives.

However, if your parents haven't managed to amass a lot of wealth through their investments, they are probably not the best people to approach in this regard. What you need is a competent and unbiased person to help you plan your finances. So, get an adviser and ensure that he understands your financial goals.

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