Successful investors across the world follow a well-defined investment strategy. There is no ‘one size fits all’ strategy. Instead, they envision, design and follow an investment strategy, to the T. As an investor, you must learn from your investment mistakes and include the lessons learnt therefrom into your investment strategy.
Investing is a structured path that you must follow. You will need a set of plans about investing in various assets and maximising returns from them. Your investment strategy can have long-term or short-term goals. People sketch out their financial plans based on observations and speculations. Be it the latest trends or even emotions that contribute to their decision-making. However, investors may end up losing hard-earned wealth if decisions are based on speculations or observations.
Therefore, investments should be made in a way that helps you reach your financial goals. While setting these goals and designing a plan to achieve them, factors like age, available funds, lifestyle, financial position, expected growth and so on must be considered.
You know that you need to invest. But that doesn’t mean that you treat it like a 100-meter race and bolt out from the starting point. Having the right mind frame is often the most important start. Prepare your family and bring them on board your plan. This will help you to integrate savings and investment as a part of your and your family’s household duties and habits.
When you have your financial goals clearly defined it is easier to finalise the investment strategy. While you finalise your goals and strategies, leave the scope for future adjustments and flexibility. You may face known milestones and unknown hurdles in your investment journey. These will demand a change in your goals and adjustments in your strategy. You can address these needs and effect such changes timely through regular reviewing. These steps will ensure that your investment decisions are backed by purpose-driven strategies.
Risk appetite is something that is massively influenced by factors like age, financial position, market situation etc. If you are risk averse, your strategy would be to invest in safe instruments like provident funds and government securities. If you are adventurous, you may invest heavily in equities, options and even cryptocurrencies. The younger you are, the higher your risk-taking capacity. This is because you have a longer time horizon to recover from losses and recessions.
Once you are clear about the purpose or goal of your investments and understand your risk appetite, you can build a balanced financial plan. You must define your long-term goals and identify the action needed to achieve them. A financial plan will define how much you must invest, which assets to invest in, the frequency of investment, and how long you will be holding your investment in your portfolio. Once that’s done, don’t allow market volatility to affect your financial goals and strategy. In a turbulent market, you can reconsider your investment portfolio but shouldn’t go into a selling mode, or worse, a panic mode.
As you give the final shape to your investment plan, you must also understand the financial market. Particularly, research the areas where you plan to invest in. How do the debt instruments behave? What is the RBI's stance on interest rates? How will the US Fed influence interest rates in the coming quarters? Similarly, if you plan to invest in equities, you must be well-versed in the basics of the stock market. This will include an understanding of the industries and sectors, reading the financials, the basics of equity trading, macro-economic factors that influence the market etc. It is always wise to seek expert guidance and refer study material for a better grasp of the financial market.
You are your best counsel in most cases. However, it is not advisable to operate in a silo when it comes to investing. As mentioned in the previous point, seeking expert guidance and referrals are important for successful investing. It could be a second opinion from an agency or consultant whom you trust or who has a track record of successful wealth management. Apart from friends, senior colleagues, parents and relatives, a professional financial advisor or planner can be of great help too. These professionals help you by advising you on investment decisions after studying your finances meticulously.
So far you have designed the financial plan, goals and strategy, understood the market and your risk appetite, and even sought advice from experts. Based on this, selecting the right instruments wouldn’t be difficult. For debt investments, you must select your short, medium and long-term investment plans from among instruments like FDs, PPFs, NSCs, G-Secs etc. For equities, you will still need to research and study stocks on a case-to-case basis and monitor them regularly. For gold, you must decide on the form you are comfortable in – be it bullion, digital, gold bonds or something else. Factors like the liquidity of the investment are also crucial for an investor.
As you add more and more funds into your investment portfolio, you must avoid emotional decisions in buying as well as selling. If the state of affairs in the market confuses you, it is important to remain patient. Experts like Warren Buffett believe in being greedy when others are fearful and being fearful when others are greedy. Therefore, it is important to take rational decisions in times of market turbulence and be patient in the wake of market fluctuations. Panic buying and selling are common in stock markets, but it is something you should refrain from as a long-term investor.
While you can invest for any duration you want, wealth appreciation in investing is accomplished substantially only when you have a long-term vision. In debt investments, small but regular investments over time result in compounded growth. Similarly in equity investments, stocks of companies with strong financials and prospects deliver a high return in the long run. Therefore, always envision a long-term plan while investing. This would be further fruitful if you manage to increase your annual investments every year or with every pay rise.
We don’t live in a world where you can follow simple Coffee Can investing tactics of buying and forgetting. The business world continues to witness and accommodate disruptive changes that frequently alter the fortunes of businesses. Research and regular reskilling through books, video tutorials, podcasts, web blogs, investment courses etc. will help you to stay updated on the latest in the financial world. Similarly, keeping track of geopolitical and macroeconomic factors like the movement of oil prices, US dollar strength, wars and industry crises etc. would also help you to be proactive in your investment strategy.