This artcile was originally published in IIK website
2011 was no easy year from an investment perspective. Given the fact that Indian diaspora is mostly exposed to Indian stock market, it is disheartening to see that India figured among the worst stock market performers during 2011. However, this article is not about telling you where to invest in 2012. Rather the article is a humble attempt to sensitize readers towards more long lasting investment habits as I am sure there will be many more years of challenging times ahead as well as opportunities. For the sake of easy read, I would organize them as Do’s and Don’ts
Have a PLAN:
When it comes to investing, most of us go for the easy option of accumulating our savings in the bank and remitting the money back to India with deployment mostly in fixed deposits. In some cases, we will go by opportunities cited by friends and relatives either in the stock market or in the real estate with occasional gold purchases. In other words, we react to opportunities with no concrete plan backing it.
Instead , we should have a well laid out plan to deploy our monthly savings. This plan should take into account your family circumstances, your age, your ability to take risks, your willingness to take risks (this is psychological) and your current and future income. While creating a plan, it is important to foresee liabilities like housing, education, healthcare for elders, etc.
Since our earnings happen fairly regularly (say monthly), our investment should also happen fairly regularly. There is always this temptation to time the market be it stock market or real estate. However, please note that it is impossible to time the market. In hindsight everything looks to be crystal clear in terms of what is a top and what is a bottom. But if you have to look forward, we should understand that we cannot predict when the next crisis will hit and from where. Hence, systematic investment in regular interval can smooth the impact and save you the trouble. Technology has made this even easier today where you can instruct your mutual fund to invest even on a daily basis.
Update your investments
It may be boring, but it is the most important thing to do at least on a monthly basis. It is critical to list all your investments in an excel file and seek current market values in order to decide whether to keep the investment or dispose of the investment. Procrastination or tendency to postpone things (lets do it tomorrow) will lead to sometimes heavy damages. Alternatively, timely reckoning of events can save you a lot of trouble.
Spread your Risks
Different investment avenues have different risk profiles. For eg., equities are very volatile in that their prices can go up or down quite fast. Real estate is illiquid and may be documentation intensive. Fixed income may be subject to interest rate risk. Gold may be linked to US dollar. Even money market investments suffered during the financial crisis. Hence, it is important to spread your investments so that the risk of huge fall in your asset value is reduced.
Plan for an Insurance
The importance of a bread winner in a family can be understood only in times of loss of life for unfortunate reasons (like heart attack/accident, etc). Many people do not take this risk seriously or even if they do they may not have taken enough insurance to protect their family after they are gone. Unlike in the past where we had only one insurance company, we now have several insurance companies offering a range of products to suit your requirement. However, care should be taken not to over insure (as it may turn out to be costly) or link insurance to investments.
We have always been seeking advice from friends and relatives, but it would help to seek advice from a professional financial advisor who is trained in this profession of providing advice. Also, the age and experience of the advisor is very important if you have to trust the advice. However, remember even advisors can go wrong. Hence, do listen to what your heart says in the matter as well.