Before making any investment decision one should follow these 12 steps to avoid risks and ensure a better return.
First, you must understand your current financial situation and ascertain your attitude towards risk. These two factors will be a framework for establishing your financial goals and the type of investments you need to make to achieve those goals.
Be practical when setting expectations from your investment and make a realistic estimate of the type of returns you expect from the investment. Past performance only provides an indicator of historical returns and is not assurance the same result would be repeated. Future market conditions are impossible to predict, so you need to look at a few factors before setting your investment expectations: Long-term and short-term track record; performance in different market conditions; and performance relative to similar types of investments.
Information is power
Information empowers you and gives you the extra edge while making investment decisions. Ask questions as you are investing your hard-earned money. Make sure you have access to and understand all of the relevant information before making any decision. Here are some typical questions to ask before making any investment: Do I have all the information pertaining to the investment? Does the investment match my investment goal? Have I understood the risks associated with the investment? What are the costs involved? How liquid is the investment? Is this investment legitimate? and what are the transparency, service and communication levels?
Failure to plan = planning to fail
Make a financial plan first and then choose individual investments that fit into this plan. This provides a more strategic method of investing rather than making investments on an ad-hoc basis or by reacting to daily market conditions.
Different investments make sense for different time horizons
Match your investments to the time horizon of your goals. For long-term goals such as retirement or children’s education, look at equity funds, which, even though volatility in the short term, are likely to give you substantial growth. For short term goals, invest in the money market or cash funds as they tend to be more stable and predictable.
As different asset classes and sectors seldom move in tandem, let the ‘ups’ of one cycle make up for the ‘downs’ and losses of the other by spreading your money across different types of investments. [Maybe we can list out some of the asset classes here?]
Understand the ‘risk-reward’ relationship
All investments carry a certain amount of risk, and normally, the rewards are commensurate with the risk you take. For example, equity funds have the ability to provide good returns over the long term, but the question is: are you comfortable with market volatility? There is no point in investing your money in equities and then spending sleepless nights due to short-term market volatility. But at the same time, you need to ensure your investments provide you returns which meet your long term goals.
There is no ‘right’ time
Trying to successfully time the market is next to impossible. Your investment decision should be based on the careful analysis of your situation rather than market conditions. It is important to remember that any short-term volatility you might face tends to smooth out over the long term. Investing is not a 100-metre dash, it’s a marathon.
Moreover, when it comes to equities, investing in a systematic manner can help capitalise on the ups and downs of the market. Mutual funds offer Systematic Investment Plans (SIP) where you invest a fixed amount every month. Thus, when the market is low, you buy more and when the market rises, you buy less. This disciplined investment approach has proven to be a successful way of building wealth for millions of investors all over the world.
Keep your emotions at bay
Emotions tend to overwhelm us whenever there is a significant shift in market conditions or when faced with unforeseen circumstances, be it good or bad. While making investment decisions during such situations, one needs to be even more careful. An objective and deliberate analysis of the situation, taking into consideration the investment objectives and time frame is an absolute must for achieving financial success.
Don’t be averse to taking losses
Most of us are reluctant to take losses, which means admitting to mistakes. Unless you have a good reason to be optimistic about the future prospects of a loss-making investment, don’t be afraid to sell. We all make mistakes but good investors are the ones who learn from them and not repeat them.
Stick to your plan but review it
Before making the investment decision, evaluate how it affects your current asset allocation plan. As time passes, your life stage changes and so do your financial needs, income and appetite for risk. This means it is essential to periodically monitor and review your investment. You need to ask questions like: Has my investment goal changed? Has my risk tolerance changed? How has the investment performed compared to the expectations and its peer group; and, is there a need to change my decision?
After all, we invest to achieve peace of mind. Let’s not make our wrong investment decisions lose it for us.
Professional financial advice
Given the variety of investment options available today, it is advisable to seek guidance from a financial adviser. Nearly every investment entails special risks that should be discussed with an experienced professional. Each investor’s goals are unique and proper guidance toward the most suitable products is essential.
There are numerous reasons why people seek advice from a financial professional, including: Researching the potential risks and rewards of a variety of investments; monitoring and managing your investments; planning to achieve your financial objectives; and reduce your paperwork.
And a financial adviser can help: Determine your financial goals and risk tolerance to develop a solid asset allocation plan designed to meet those goals; provide guidance and expertise on tax, retirement and investment planning; assess the potential risks and rewards of various investment options; monitor and manage your investments over time and recommend timely adjustments to your portfolio to keep your asset allocation plan balanced and on target; provide market knowledge and planning expertise; and offer objectivity, support and guidance during periods of market volatility.
While no means an exhaustive list, these simple tips will put you on the right path to achieve financial peace of mind.
The writer is director, Gulf & Eastern Mediterranean, Franklin Templeton Investments (ME) Ltd. Views expressed are his own and do not reflect the newspaper’s policy.
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