Every year starts with a handful of New Year resolutions – losing weight, giving up a bad habit, spending more time with family, or anything personal or professional. When we can make so many commitments to different parts of our lives – why forget our money? Let us welcome 2010 with ten simple investment resolutions we can all strive to make:
1. I will truly invest for the long-term
Everybody claims to be a long-term investor, but nobody really is. Most investors are relentlessly checking their portfolio every day, often more than professional money managers, and they lose sight of the long term. Checking your portfolio every day leads to overtrading, which only makes your broker and the tax department richer. Don’t forget that when you invest in a stock, you invest in a business – businesses don’t change materially every day.
2. I will not trade on tips
We love investment tips, from our brokers, bankers, family, and cocktail party acquaintances, particularly when they come for free. We are also happy to trade on those tips, forgetting that most of them are not grounded in any kind of reality. Anybody with an opinion who has watched a little bit of TV will give you a tip – that does not mean it makes sense and that certainly doesn’t mean you put hard earned money behind it.
3. I will be disciplined and not emotional about investments
It’s very easy to see an article about the 10% rise in a mid-cap stock and go out and buy it, forgetting that news is meant to get you excited. If there is one place where discipline and not emotion pays off, it is your money. Make a plan when you build a portfolio – why are you building a portfolio, when do you intend to sell it to use the money, when would you increase it?
4. I will do due diligence on my fund manager
It is very easy to invest with a fund manager and then blame him when something goes wrong. Do the due diligence before investing. Just because you are investing in a known fund house doesn’t not mean the fund manager is competent. Find out about the fund manager’s track record and ask the manager about their practices – accounting, reporting, redeeming funds, talking to clients – to see if you can really rely on them.
5. I will have reasonable expectations with my money
Investing in the stock market will not double your money in a year – you should stop working if it did. Have reasonable expectations from your money and money manager. A manager who can beat the market by 5% every year net of all fees has done very well by global standards and a manager who claims they can beat it by 30% a year is lying. Any equity investment will lose some money in a 2008 like crisis – no manager can perfectly call a crisis and neither can you.
6. I will try something new with my money
Are you tired of saying every money manager sounds the same and that there is nothing new in the market? Think again – the market is full of young boutique managers with interesting ideas and new approaches to investing. All you have to do is seek them out and give them a listen. Suspend your existing beliefs and learn new approaches to investing, and try them out, at least in a small dose. If nothing, it adds valuable diversification to your portfolio.
7. I will invest based on my needs
No two investors are the same and every investor has different needs based on their income, life stage and responsibilities. Investing isn’t about gambling or playing the market for fun, it is about building long term wealth to meet your future needs. Understand what your needs are and then invest appropriately in different asset classes and instruments.
8. I will think about risk
Most investors conveniently ignore the more important side in the risk-return equation of finance – the risk side. Risk exists and is different by stock, sector, and asset class, and every investor should have a basic understanding of risk. Don’t evaluate the return on any investment independent of the risk of that investment. Get mathematical with risk – you always want to know the return numbers on an investment, ask for the risk ones too.
9. I will not follow the herd
Who doesn’t love following the herd, whether it is movies, music or money? If everyone is subscribing to the Reliance Power IPO, there must be something great about it, right? Wrong. What everyone is investing in or not investing in doesn’t have to be right – in fact, investing by nature is about discovering opportunities that others haven’t. Next time, when you make an investment decision, don’t look to the world for validation.
10. I will invest, today
If you do one thing in 2010, don’t try to time when you invest. There is always a great excuse not to invest – market has run up too much, I am busy with other things, I don’t understand the market, afraid of a correction, can’t afford it. All the stars in the investing world never align and no time is a perfect time to invest – that is why markets work. If you are truly investing for the long term (Resolution 1), there is no difference between today and two weeks later.
Keeping even of a few of these simple resolutions will make us smarter, safer, and if nothing else, saner investors. This decade, let’s remember the lessons of the financial crisis, let’s be cautious yet creative with our money, and most importantly, let’s take our money seriously.
Welcome to 2010 – wishing both you and your money a Happy New Year!
(Source : Moneycontrol.com)
(The author is co-founder of Forefront Capital Management, a specialized portfolio manager providing equity investment solutions.)
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