We live in a dynamic, evolving, uncertain world. The investment landscape is too constantly changing with uncertainty being omnipresent. The wisdom to know what to do and how to act in the face of this uncertainty will decide who and what will succeed or fail. This is the reason we must time and again go back to the fundamentals of investing, especially equity investing.
Presented here as commandments, these are the ground rules and behaviour which suggest specific actions to pursue or avoid. The 10 commandments distil the collective wisdom of investment gurus and are timeless in their relevance and importance, and we need to remember it from time to time. In an uncertain investing world, the below ten commandments can help you navigate and find success as investors.
Thou Shall Avoid Emotional Investing
“If you can’t control your emotions, you can’t control your money.” - Warren Buffett. This is the most important commandment and hence the first on the list. Without separating emotions from investing, none of the below commandments will be of much use. Equity markets, as many now would agree, often experience stages of fear and greed, as recently witnessed in the past few months, again. Anyone falling prey to the herd mentality is bound to make mistakes. We should refrain from the FOMO (fear of missing out) emotion and take a step back, think independently and rationally, always.
Thou Shall Not Forget Asset Allocation
Smart investors always have an eye on their Asset Allocation. The next commandment requires one to have an asset allocation strategy to manage one’s overall investment portfolio. Within asset allocation, one has the option to choose fixed or a dynamic asset allocation approach, depending on your risk appetite. This can be revisited every few years or after any major life event. A regular rebalancing to restore your asset allocation, either on a fixed frequency and/or driven by sharp market movements, is all one needs to do on an ongoing basis.
Thou Shall Always Diversify
Beyond asset allocation, diversification ensures that you do not concentrate your holdings and risk into limited funds or securities. Equity diversification can be across different market capitalisations (large/mid/small/mixed), fund styles (growth/value), even countries (domestic/international), etc. As compared to direct equity investing, mutual funds offer much better diversification as a single fund will invest in many stocks at any point in time.
Thou Shall Not Ignore your Risk Profile
A risk profile is an assessment of an individual's willingness and ability to take risks. It is important for determining a proper investment asset allocation for a portfolio. We can think of risk as the trade-off between risk and return, which in other words is the trade-off between earning higher returns at higher probability /risk of losing capital or earning lower returns at a lower probability /risk of losing capital. We should see the risk profile as the weighing machine to avoid financial and emotional damage beyond what you can handle.
Thou Shall Always Have A Plan
By failing to plan, one is planning to fail. To accomplish anything worthy in life, preparation /planning is required, even for financial well-being. Irrespective of how big or small your savings or your goals are, planning is critical to reaching your destination. A good plan identifies where you are today, where you want to go and more importantly, how to reach there. If one put it in a sequence, there are first dreams, then goals, plans, execution, course correction and finally achievement.
Thou Shall Follow Discipline
Being disciplined at handling and saving money is a lifelong behavioural change. Small things, repeated many times over, over many years, can result in wonders. Being disciplined for an equity investor would mean being steady, sticking to and following your plan and not reacting to the market craziness. Often disciplined savings in equity is also promoted rather than putting all your money at the same time in the markets. Disciplined savings with Systematic Investment Plans or SIPs in equity mutual funds is a very popular approach to disciplined savings in equities, which is hard to replicate in direct equities.
Thou Shall Not Predict Markets
If there is one ability which all equity investors and managers dream of, it is the ability to predict markets. Unfortunately, no one is gifted with this foresight. What is amusing is, it is easier to predict over many years rather than to predict the next day! Successful investors are not better market predictors but are more researched, they hold on to their convictions, use common sense and invest for long-term, where the probability to succeed is high.
Thou Shall Not Leverage
Leveraging is the easiest and the fastest way to bankruptcy. Period. The only people who may leverage are the ‘traders’ running the business of short-term trading in stocks /indices. Derivatives, comprising futures and options, again are called as the weapons of mass destruction and is a territory of only those who wish to take it up as a full-time business, willing to sacrifice mental peace to take up daily risks. Retail investors should clearly stay out of this world which can take away a lifetime’s savings without a day’s notice.
Thou Shall Not Run After Tips
What happens when you mix equity investments with excitement? It becomes gambling. Surely, you can hunt stock market tips, buy penny stocks, bet on horse races, buy lottery tickets, all at the same affordable prices. But please do not paint all this as part of your equity investments. Buying established companies or good funds is far more predictable than buying into the unknown, fly by night, companies available at prices cheaper than chocolates or public bus tickets.
Thou Shall Not Make Big Mistakes
Sometimes, all it takes is one mistake to ruin the good work done over many years. Such mistakes need not be limited to equity investing but can be in any sphere of life which can destroy your wealth. Investing in unsolicited, get-rich-quick schemes, bad property deals, business failure, unemployment, legal disputes, marital break-down, etc are many of life’s realities which not only take our mental peace but can also cost us dearly. Lack of adequate insurance for death, disease, disability and damages to property, business establishment /goods etc by far are the most common reasons behind ruining a family’s financial well-being. Ensuring safeguard against risks, being careful in decision making, creating multiple earning sources and smartly compartmentalising your investments is needed.