Tuesday, August 30, 2011

The golden rules for the investors

If done in ignorance, investing can quickly become a complicated thing and management of investment portfolio can be even impossible. Therefore, any investor wishing to obtain satisfactory yields must observe and follow few simple rules:

Rule 1: choose long term investment time horizon

Investing in financial markets through shares must be seen with a vision over a period exceeding 5 years. In this perspective, changes in the market in short term – as they can temporarily affect the value of your assets – do not come into picture and you need worry too about the strategies required to negate short term market fluctuations. A high proportion of your assets, however, must maintain sufficient liquidity to meet your future needs. You must not invest when market it bull, in bull phase invest in those financial instruments that gives you reasonable liquidity so that you can reinvested this in a period of sharp declines.

Rule 2: Do not be influenced only by the past performance of a fund

When you need to understand the performance of a fund, it is common to read the past statements. Good past performance are necessarily attractive, but it should not be the sole criterion for choosing a fund! Identify the potential future growth of the fund a perform more detailed analysis. According to Getmoneyrich “comparison of mutual funds requires a more qualitative analysis of funds and about their fund managers. Among the criteria for analysis, it should be noted that the human factor is becoming more essential as it is an important source of value creation. In short, the investment will always be a mixture of science and art”

Rule 3: Selling is not a crime (for long term investors)

You must not feel guilty to sell when the loss caused by a share is only increasing. Often investors are cling to these shares, hoping to recover their losses and even buy some more quantity at lower prices to lower the average purchase price. A Share that does not appreciates in value can be found by observing their movements for a years in a portfolio. So watch your shares and when you see only negative movements, try to find its reasons and sell if required. See what you are losing by not selling, the same fund hooked to this loss making shares could make at least reasonable money for you in other good shares.

Rule 4: trust the information rather than emotion

Do not get carried away by your emotions. Sometimes the stock market euphoria may lead you to act differently. Your decisions may be biased by emotions and erroneous reasoning. You can ready more about psychological factors that leads to investors to make mistakes.

Rule 5: If you are not an expert better not to put all your eggs in one basket

Investing all of your money on one or few shares brings high degree of risk of losing. If your investment portfolio consist of only few shares, then their bad performance will show your portfolio earning in red. Whereas if you have a variety (shares of different sectors) of it is most likely that all of them will not show bad performance at a time. Hence it a common practice in share market investment that if you are not an expert, you shall always diversify your investments by not putting all eggs in one basket. Diversify, here is the slogan! By investing in several types of products in different sectors, different countries and asset classes, you reduce risk and can increase your yield potential. It is a good way to boost your long-term savings, while meeting your investor profile.

Rule 6: The growth will never continue till eternity

One day, the growth stops. If a share is growing at 20% per annum then a day will come when its growth will saturate. It is common. The bigger the company gets the harder it is for them to continue growing faster. This time will come not soon but in 7/10 years time on average. This is the time when you can actually think of selling. But before selling just see what dividend yield that company is making for you. If it is 1.5 times the fixed income returns try to hold it forever. But in short we must know how to sell and take their profit.

Rule 7: Buy when others are selling and sell when others are buying.

Generally we always do the other way round. We are tempted to buy when stock market is roaring. When stock market is going great guns only then we decide to enter. Similarly when the bull phase ends, and market begins to fall, people sell. In investment you cannot flow with the stram, you have to do other way round. This is called ‘timing the market’.

Rule 8: Never forget the rules!
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