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Should you follow norms of investing?

P V Subramanyam     December 24, 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.

Don't prepay the home loan: Most of us prefer to opt for a 20-year home loan while buying a house so that we can pay the equated monthly instalment (EMI) comfortably. When our income increases subsequently, we tend to be in a hurry to repay the loan.

This is not a good strategy. If the long-term returns from equities are much higher than 8% a year, why should we prepay the home loan? It makes more sense to keep paying the EMI and, at the same time, investing in equity SIPs. In the long run, this can make a surprising difference to your portfolio.

Avoid the Public Provident Fund: The PPF isn't a profitable avenue for everyone, especially young investors. If they want to invest in a secure long-term instrument, a better option would be an index fund. Over 16 years, the fund would deliver much higher returns than the PPF.

Surrender policies: For some people, it's anathema to admit they've made the wrong decision and bought a bad policy. So they continue to suffer. In most cases, it's better to take the losses, mentally and physically, and reinvest in another option.

Don't go for gold: Reduce participation in the futures and options market, realty market and gold. These are good avenues for investors who are highly experienced, traders who are willing to take high risks or professionals in these fields.

They know the tricks of navigating and profiting in these markets. Retail investors should avoid these complicated areas, including property speculations. However, if they are keen to build a commodity portfolio, they can invest in a couple of products.

P.V. Subramanyam
Financial Trainer, Iris

Contrarian Investing is the best strategy
1. Swim against the tide
2. Pick stocks that MFs are buying?
3. Are cheap stocks good investments?
4. Are stocks better than FDs?
5. Can you lose money in debt funds?
6. Is online trading cheaper?
7. Should you invest in equities?
8. How online plans benefit buyers
9. Should you let term plan lapse?
10. Is gold a good investment?
11. Is renting a house cost-effective?
12. Follow rules of investing?

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