Investing is a process in which most of us engage ourselves through our lives to make the most efficient use of our hard earned money. There is a thin line between successful investing and the disastrous impact of failed investing. In fact, many people get turned off completely by the thought of investing thanks to some bad experiences which end up colouring their entire view of the process. There are a few common practices, habits and mindsets that generally lead investors to success. Read on to know and inculcate seven such practices:
1. Understand the basics of financial products
Finance is a topic that can initially seem alien and even a turn off. But, if you persevere and make an effort to understand the basics of financial products, it’s an education that will stand you in good stead for all investing. It is important to learn about concepts like compounding, rate of return, mutual funds, debt, equity and the likes. This ensures that you can also make sense of any basic financial commentary that you might choose to follow through your investing years.
2. Keep long term view in mind
This is a major mindset shift required to be successful in investing. Investing requires patience and a long term view. Expecting great returns in one year is a mark of impatience and haste that does not go well with investing. Even a great investor like Warren Buffet is some one who has reaped or grown most of his wealth over decades. Keep the long term goal in mind while investing.
3. Look to getting efficient returns at low cost
Indians are known to be fantastic culturally when it comes to bargaining. Why then do we fail to notice the cost implications of investing? Most investors still fall for the so called “free mutual fund distributors” not realising the difference between regular and direct schemes whereby regular schemes integrate the distributor commissions within the returns, unlike direct mutual fund platforms like Money Front. Notice the costs that you pay while investing, be it in regular or direct schemes, mutual fund expense ratios or even direct stock transaction brokerages. While the percentages seem low, over the years and on the amounts they end up making a substantial difference.
4. Understand the risk return matrix for every investment
In investing, risk and return are directly proportional to each other. The higher risk you take, higher the probability of returns from that investment. Successful investors internalise this matrix and question any product that they consider for investment to understand the risk they are entering for the returns they can expect. They probe to check if the amount of risk is something that they can stomach or whether they should settle for lower returns for the risk level that they are comfortable with. Understand the level of risk that works for you and mould the expectation of returns from that investment accordingly.
5. Pay themselves first
For generations, Indians have been known for their high level of savings. With increasing consumerism and avenues of spending, that level of saving is seeing a dip. Successful investors realise that more important than a few percentage points in returns is a regular habit of putting in money to invest. Pay yourself first is a terminology to refer to putting aside money for your future self with every pay check and using the remaining funds to pay for the present and past purchases (vis-à-vis loan EMIs).
6. Work on self educating and improving knowledge of investing
The financial landscape is ever evolving. Successful investors understand the dynamic nature of the industry and realise the need to stay updated. You can do that too by hunting out great personal finance blogs (like this one 🙂 ) or financial publications to make sure you are aware of any new developments which may impact you as an investor. Another great avenue is Youtube where you can simply key in a term or a concept that you are curious about and you could find a host of short explanatory videos.
7. Do not get swayed by extreme news to let emotions rule
A lot of people believe investing is about having trigger happy hot fingers. So many of us associate investing with day traders or colleagues who are checking out the market multiple times a day. However, as this research shows for stock trading, transacting ever so often is linked much more to lower returns than to successful investing. Even with mutual funds, time invested in the market is far more important and useful than timing the market. Most investors go through multiple cycles. Successful investors know that during bear markets, most of the losses are notional and on paper, choosing not to let their emotions and loss aversion get the better of them.
Investing is simple but not easy. A lot of us end up complicating it, leading to mistakes and failures. Keep it simple and trackable with a long term view and you are bound to become a successful investor.