People who invest for the long term also become a part of the growth of the respective companies.
Speculators who try and attain substantial gains overnight also face the risk of falling well short of their goals and ending up in a dismal financial position.
Here are some tips and suggestions that investors should embrace while planning for a long-term wealth-creation goal.
Stick to the basics: One of the most essential rule for wealth creation over long term is to always stick to the basics while taking any investment-related decision. For people using the equity market route for wealth creation, it is imperative that they invest in companies with strong fundamentals rather than running after penny stocks or lesser-known companies. Learning to read the fundamental quarterly analysis and financial results of companies also goes a long way in understanding the likely impact the company may have in the future. Another fundamental rule related to the basic investment technique is to always look out for sectors that are more likely to have an impact. Since 2014 is going to be an election year, understanding the party manifestos of the likely parties to form the government may give some tips as to which sectors are likely to receive a government-backed impetus once the new government is formed.
Dont make investment decisions on market sentiment: One of the biggest mistakes most amateur investors make is by taking investment decisions in haste during a negative market sentiment. Remember markets will always have a up and down ride and a negative market sentiment should not dissuade you from a long-term investment decision. Historically speaking most people who have made a fortune from equity markets the world over have been all long-term investors who continued to show the faith in the markets even during the bearish phases. With the general election slated to be held in the first five or six months of 2014, it would essentially be important to control all investment decisions using a calm head and not flow with the market sentiment. For being a successful long-term investor one needs to look at the bigger long-term perspective than the smaller phases.
Diversify smartly: Diversification plays a very important part in overall long-term wealth creation. Instead of focusing on only one set of investment, like equity markets alone, the best way is to hold a diversified overall investment portfolio. Investing in exchange-traded funds (ETFs), mutual funds, debt funds and real estate are some of the options that every investor must consider before finalising the share for each sector. Even in the equity sector, the companies must be selected in such a way that majority of the sectors that are likely to offer substantial gains are included in ones financial domain.
Infrastructure, for example, is paramount for Indias success and both the current government and the prime Opposition party have stressed the importance of attracting investment in the sector. Investing in infrastructure offers a better chance of attaining wealth creation in the long term. The selection of sectors will make a huge difference and importance must be given to each sector by understanding the market dynamics for the sector.
Average out losses: One important aspect each long-term investor needs to follow is the principle of averaging out stock losses over time. If you are holding on to a company share which is dipping below your purchase price substantially, selling the stock as a knee-jerk reaction would offer substantial loss. A better way is to keep purchasing the share at lower levels to bring down the average purchase price of your overall share portfolio for that company. In case you believe in the fundamentals of the company and its ability to bounce back and perform in the long term, such averaging out of share prices can in fact be beneficial for better wealth creation in the long run.
The writer is CEO, BankBazaar.com