It is important for investors to practice good investing habits as volatility is sky-high, the economy is uncertain and market sentiment is unreliable.
It is important for investors to practise good investing habits as volatility is sky-high, the economy is uncertain and market sentiment is unreliable. It is important to set appropriate goals, save regularly, and monitor your progress. Follow the five steps below and you are likely to feel good about your portfolio in the long term.
Have a goal
Set goals and make an investment plan to meet the same. Goals could be short or long term. A short term goal may be a new car whereas long term could be sending your children abroad for higher education, building a nest egg or leaving a legacy for your heirs. Write down your goals and review them once a year to see how you are doing and whether your goals need to be revised. To achieve your long-term goals, use long-term investments such as shares and bonds. Use safe and interest-bearing instruments for short-term goals.
Magic of compounding
Time is on your side when you invest. The earlier you start, the easier the saving will be. For instance, if you invested `10,000 in shares of a large company in 1999 and earned an average annual return of 10.4%, you will have `26,869 after 10 years. After 30 years, you will have `1,94,568. This is the magic of compounding. Even if you earn 7% a year, you would have `76,123 after 30 years. While the returns are not within your control, you can control your savings and investment. Just start saving as much as you can.
Go autopilot mode
Make your investing automatic. The best way to do that is to invest a fixed amount regularly. This practice, popularly known in investment literature as dollar-cost averaging, ensures that you buy more shares when they are cheap and fewer shares when they are expensive. There is also a psychological aspect to this. As you invest a little every month, you cannot put all your money in at the top of the stock market. Further, since a certain part of your monthly investment never hits your savings bank account and goes directly to savings, you are less likely to tinker with it and that is a good thing.
Keep costs less
The stock market has long cultivated the notion among investors that you have to pay premium prices for good performance. In fact, a bad investor with low costs can do better than a good investor with high costs. Consider two funds. Both of them provide 10% return before expenses. Fund A charges 1.5% a year while Fund B charges 0.5%. An investment of `10,000 in Fund A would be worth `1,15,583 after 30 years whereas Fund B would be worth `1,52,203, which is 32% more than that of Fund A.
If you want to see your biggest enemy when you are investing, look in the mirror. Our minds are often wired to do exactly the wrong thing. The most common trap is that one can time the market, jumping in for bull market and exiting for bear market. It just does not work and making an attempt to do so hurts your portfolio performance. Empirical evidence has found that the average investor lost nearly half a per cent in returns by moving in and out. This gap widens around major market turning points as investors tend to panic and sell near market bottoms missing out the rebounds.
To conclude, what matters is that being an investor you should worry less about owning shares and more concerned with what part of the stock market you own.
(The writer is a professor of finance & accounting, IIM Tiruchirappalli.)