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http://www.managementparadise.com/article/6563/investment-strategy-overview-of-common-mistakes-amp-considerable-factors
Category: Financial Planning / Finance Strategy
Published: Sunday 8 June 2014

Investment Strategy:
Overview of Common Mistakes & Considerable Factors

By Adri Mitra (M.Phil, M.Com, PGDM)

Under this heading, I am going to discuss two topics
regarding Considerable Factors & Common Mistakes
before/ during Investment.

Most Important Considerable Factors

We, maximum people are believed to be great savers
traditionally, with an average savings rate close to 30%
per annum. However, our investments have been pretty
static in nature. We prefer bank deposits (which yield 4-
5% to 8-9.5%) to equities (which can yield up to 12%
in the long run). The blame cannot just be thrown on
the global economy or the policy paralysis of Indian
govt. It has to be lack of financial awareness.
Stats don't lie. The insurance companies/ agents know
this pretty well. According to the latest news, investors
have lost Rs 1.3 trillion (one lakh crore) due to mis-
selling of insurance policies. This is a huge number.
Gone are the days when you could double your money
in 5-6 years just by doing a post office deposit. Time
has changed and so should we. There has to be a
strategy in place to deal with your finances.
Below are 5 important factors based on which an
investment strategy can be finalized.
Age: Our mindset changes as we grow old. We tend to
up skill ourselves on various things in life. Financial
planning also needs a similar treatment. When in mid
20's, we do not have any dependants and this is the time
when we start off our career. Usually, in this stage it's
about spending, spending and more spending. Impulse
buying is very high and we cannot resist the temptation
to buy the latest jeans or the ultra modern tablet. We
could do a little bit better by saving in small amounts
every month, listing all expenses or making a simple
monthly budget.
In our 30's, we would have dependants. We would love
to buy that dream house or that latest sleeky car (thanks
to those tons of loan options). But, when responsibility
arises, we should be ready to compromise. We should
be looking at building assets and look for loan only
when it cannot be avoided. Personal loans should be a
strict No'. We should be able to slowly increment our
savings as and when our salary rises. This is the perfect
time to plan for retirement. Retirement planning at the
age of 30 years? You must be thinking am kidding. No,
am not. Power of compounding works for you when
you start early. There would be fewer chances of you
missing on your goals if you start early.
Also, make sure you are covered with sufficient
insurance since your family should not be missing your
presence financially.
40's is a stage when our children would be young and
expenses would naturally increase. So, have an eye on
all such expenses and plan accordingly. If you have
missed out on taking a health insurance, take it now.
You might not get one if you delay it or even if you get
it, it could be beyond your affordability. When in 50's,
you might feel you have worked enough and may want
to retire early. Make sure you don't take too much of
risk in this stage. After retirement, continue to be
conservative but make sure you don't lose out to
inflation because you would not have hikes in income
to cover it up.
Risk Appetite: Risks are inevitable. There is no
investment without any risk. Always know your risk
appetite before investing in any instrument. Think how
you would react if the stock you have invested dips
20% in a session. Based on such questions, decide
whether you want to be an active investor or a passive
investor. Active investor is one who actively buys and
sells. He / She believes he / she can time the market.
Passive investor is the one who buys those funds which
do not need active intervention, such as index funds.
Goals: Every investment should be linked to a goal.
Your investments should not be a wild goose chase.
Clearly list all your goals and then prioritize. Do a
backward calculation with regards to your goals and
then work towards your goals in a systematic manner.
Your goals should be SMART (Specific, Measurable,
Attainable, Realistic and Time bound).
Time in hand: To get the right strategy going, you
need to put in time regularly to update yourself with
knowledge on financial markets and instruments. If you
are very busy with your work and cannot put aside at
least 4-5 hours every week for your finances, you need
a financial planner. He would be able to guide you
through all aspects of your finance and also suggest you
a proper investment strategy based on your situation.
Asset allocation: This is the mother of all strategies.
According to a survey, 90% of returns in a portfolio are
due to asset allocation. Asset allocation combines
factors such as diversification, liquidity, risk etc. It tells
you how much you need to invest in a particular asset
class. Suppose, if you have Rs.10,000 to invest, it
would tell you how much you need to invest in liquid
funds, balanced funds, large cap funds and so on.
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If you ask me if there is any thumb rule for this, I would

say no. All the above factors combine to make that ideal
asset allocation.
Conclusion
There is nothing like a one size fits all strategy. It
would depend on multiple factors. Once invested
should not mean invested forever. Investments need to
be monitored and rebalanced regularly. Again, if you do
not have the time and knowledge to do all this, better
consult a good financial planner.

Most Common Mistakes while Investing

Everyone knows that money needs to be invested
somewhere and not just saved. Like everything else, we
make mistakes even while investing. Let's discuss the 8
most common mistakes made by us while investing in
various products.
Buying on obligation: Quite often one of our
friends/relatives comes to us with an offer to buy
insurance/mutual funds. They tell us that this is the best
product designed and created just for you. And you buy
it either because you believe him or out of an obligation
that you cannot reject him. This is a common scenario
in life insurance. Your friend/relative would be an agent
of a life insurance company and would approach you
whenever he is short of his target. You decide to help
him by paying premium for an insurance policy. You
ignore the fact that you had missed out on an
opportunity to buy a good financial product which suits
you because you have invested somewhere else.
Taking Free advice: I have learnt that a lot of
investment decisions are made during a coffee break
with your friend. He tells you about a product in which
he has invested a few days back. He also says that you
should be investing in it for your good. Without even
knowing about it properly, you make your mind upon
buying it. You are happy that you have received an
advice free of cost. However, this free advice could cost
you in the long run. Before accepting his advice, did
you think of his skill set/knowledge in suggesting you
this product?? Is he qualified enough to advice you? It's
better to take some time to research a good financial
planner and pay him fees for his advice.
Investing Randomly: A lot of times you may just pick
a product because you heard that it is good. It is a
random investment. Have you considered your goals,
objectives and time frame of investment? If you did not,
don't worry. Many of us do not do it either. You might
have picked a mid/small cap fund with high risk
without knowing that it is for a goal which is 6 months
away. Had you thought of that goal before investing,
you would have picked a short/ultra short debt fund.
Investing without Research: One thing which always
lures us into purchasing a financial product is returns.
Our eyes lit up whenever we see returns of 10, 12 or
15%. There are products which have given these returns
and you might have chosen one of them based on past
performance. But, is returns the only criteria for
selecting a product? Shouldn't we also know about
aspects such as fund manager, taxation, liquidity, risk
etc. Doing proper research is necessary before investing
as you would know the pros and cons of a product
beforehand. It will also help you make informed
decisions.
Not Diversifying: I know that you might have read this
phrase umpteen times Don't put all your eggs in one
basket'. The phrase is perfect from an investment
perspective. You need to diversify if you are serious
about your goals. A long term goal such as retirement
cannot be achieved through a debt product like FD/RD.
In the same way, an equity fund does not suit a short
term goal such as vacation after 5-6 months. A tasty
recipe is a mix of different spices. In a similar way, you
need different kinds of products in your portfolio to
derive the best from it.
Not having patience: Patience is definitely a virtue.
Great inventions were not made overnight. Some
investments are the best only when held for longer
periods. A common mistake by most of us is that we
sell a product if it has gone down after a few months of
buying it. You knew that the product was volatile and
hence might fall in the short run. Instead, emotions take
over and you forget that you had done enough research
on it and picked a good financial product. Many
investors shy away from mutual funds for the same
reason. Next time someone talks about mutual funds,
they tell him/her to stay away from such products as it
failed in their case.
Trying to time the market: Timing the markets is
something which even experts have failed to achieve.
According to me, trying to time the markets is like
going on a wild goose chase. Moreover, traders should
be doing it, not investors. If you want to be an investor,
invest in a product according to its merits and demerits.
There might be occasions such as recession when even
fundamentally good stocks also go down. But, it's just a
matter of time. If it's good, it will bounce back. Even
the best of equity mutual funds have gone down when
markets were down. But, they managed to weather the
downside and delivered pretty good returns later.
Staying conservative when young: The final mistake
which I wanted to state is that a lot of us try to be
conservative when we are young. It could be because
our elders have advised to be so or because of our past
couple of experiences. This is a time when we need to
be aggressive. Important goals such as children's
education, children's marriage, house, retirement, etc
would be far away. Conservative products cannot take
you to these goals. You might have heard about the
power of compounding. This is what will take you to
such goals. Take risks by investing in equities. In the
long term, equities deliver returns of 12-15%, which no
other product can. However, take note of the term
long'. You may have to wait for 10 years or more to
achieve such high returns. Of course, there are other
factors such as portfolio review, re balancing, etc which
you need to take care of in this period.
Conclusion
These are some of the common mistakes made by us. If
you had been into investing for a few years, you would
have already learnt most of these. If not, it is better to
learn soon. If you have noticed any other mistakes
made while investing, do share with us.