Are you a smart investor?
I don’t know about you but I’ve learnt my lessons after burning my fingers.
Why should you read this?
I am neither an expert nor have tasted stupendous success in my investment journey.
The short answer is — you don’t have to.
But if you do, you stand to learn from my mistakes. And know what has worked for me — that could work for you.
But before that, here’s how I started.
The first investment I was sold was an insurance policy that worked more for the agent than me. It was simply put, a waste of money. Some of you Gen X folks who have fallen into the same trap will know what I mean. I had to bear it for a while before I switched to term insurance.
I entered the stock market only when the company I worked for went public. The IPO provided a certain percentage of allocation to employees who applied. I opened a demat account, secured shares and made a small profit when the stock was listed.
I had tasted blood. I made more money in one shot in very little time than I used to earn in salary over months.
Easy way, I thought, to improve my standard of living.
Thereafter, I dabbled in a few stocks but made very little. It was only when the next company I joined, listed in the stock market, did I make an even bigger profit.
Some bets I made subsequently worked out for me.
Shortly after, I was introduced to a financial advisor whose company manages financial investments and assets for his clients. When I asked him how much annual return I can hope to make if I signed up with his firm, he said it depended on my risk appetite and investment horizon. When I clarified my position on both, he mentioned a conservative number, without much risk.
“I made double that number last year on my own in the stock market,” I boasted.
He smiled, congratulated me and said, “Maybe you don’t need me then.”
A thorough gentleman, he knew I was lucky to have made what I did the year before. There was no guarantee I would repeat it in future. But he kept his grace and did not argue.
Soon after, I burnt my fingers, after tasting initial success. A few bets went horribly wrong.
I bought a telecom stock at 450 which I sold at 550 the same year. My excitement and newly-earned profit led me to buy the same stock back at 650. It is now languishing at around 2 rupees per share.
The stock brokerage platform I use sent recommendations every quarter along with how their past recommendations had fared. Their reports showed a high degree of success. After mulling over it, I finally decided to pick their suggestions. Thereafter, one out of three stocks I invested in (from that list) plunged to its lifetime low. The other two didn’t do well either.
One of them was a real estate major that had seen consistent growth. Its fortune hit south after I bought its stock at 120. The stock now hovers in single-digit range and briefly breached the double-digit mark in the last one year.
After my debacle, it seemed my honeymoon with the stock market was over. My short success had led me to believe I was a smart investor. Reality dawned on me.
I signed up with the financial advisor and entered the world of mutual funds where I continue to remain invested. Ever since, I trust him, accept his expert view on where to invest, and put no pressure to generate higher returns.
How has that worked out, you may want to know.
I have done okay.
Could I have made more? Of course! And even lost more.
But I am not greedy. I don’t look at my portfolio more than half a dozen times in a year. I don’t get too happy when it is doing well. Or too sad when it’s not. My new thinking has helped me overcome big bull and bear phases in the stock market.
Aside from my SIPs (Systematic Investment Plans), I did pick a basket of stocks in May 2020, a little over a month after the coronavirus had locked down most parts of the world. The choices were mine and every stock made money for me. My investment ego that had taken a beating over a decade ago managed to salvage some pride lost over the years.
It was great timing, you may think. And I agree. I was lucky I entered at the right time. Those who entered a month before me, made much more money. More on timing the market after a few paragraphs.
Why You Should Care
I am no expert. Not even close to it.
My story may help you if you are new to investing. Or just about to begin. If you are an expert, you don’t need to read this.
My investing experience over the years has taught me some lessons that I am sharing here for readers in the first two categories.
Lesson 1
Do not invest directly in the stock market unless you understand it well
It is better to trust qualified fund managers who pick a basket of stocks based on their skill, research and experience.
I have gambled away (and I say this because I invested large sums without proper research) based on my whim and limited knowledge before I learnt my lesson.
When I directly picked stocks, I’d go for big names or those who operate in the industry I belong to. Over time, I figured it is not the right way of investing. Your investments should be backed by credible research.
Lesson 2
If you have a big amount to invest, let’s say 5-10 lakh or more and you want to play the game yourself, it is better to invest in a basket of stocks
Pick 5, 7 or 10 stocks rather than one stock. Even if they are recommendations from experts.
Five years back, I parked a big chunk in one stock. The stock was on an upward trajectory and big broking houses had picked it as a ‘strong buy’. I did and it set me back for a long period of time after it plunged.
Lesson 3
If you go the mutual fund route, diversify your investments
Do not bet on just one asset class. It helps manage risk by spreading investments across different asset classes and types of investment, which helps reduce the impact of market fluctuations.
Spread your funds across at least 2-3 asset classes like equity, debt, real estate, gold, etc. You can reduce your risk by investing in shares of companies from different sectors and of market capitalizations.
Lesson 4
No matter how good the company’s financials and future prospects are, do not invest a sizeable kitty in the stock of a company you work in
“God forbid, the fortune of the company nosedives, you stand to lose both your job and your financial investment,” my financial advisor warned me.
If I sum up the last three lessons mentioned above in a single line, it would be — do not put all your eggs in one basket.
Lesson 5
Choose index funds if you want to invest in mutual funds but do not wish to follow the picking of any specific fund manager
Also known as exchange traded funds, these are passively managed funds investing in the same securities as present in the underlying index in the same proportion. These funds attempt to offer returns comparable to the index that they track.
The applicable fees here are low because of the very nature of the funds. As it mimics its underlying benchmark, there is no need to hire a team of research analysts to help pick the right stocks.
If you are okay with predictable returns and want to invest in the equity markets without taking much risk, look no further.
Lesson 6
Investing with a long-term horizon works best
Don’t track your fund performance daily, weekly or monthly. Or expect desired results in the short-term. I did that in my early stages and it only brought disappointment or anxiety.
Investing requires loads of patience and a commitment to stay the course. The benefits of compounding are best experienced decades after you’ve begun. However, that does not mean you adopt a fill-it-shut-it-forget-it approach.
More on this, in the next lesson.
Lesson 7
Keep track of what’s happening around you
Any important event happening in any part of the world can impact our financial markets. Hence you need to periodically monitor your portfolio. If you can’t review your portfolio due to time constraints or lack of knowledge, then you should take the help of a good financial planner.
Lesson 8
Do not park cash in your bank account to cover more than 2-3 months of expenses
Remember savings interest income gives you returns lower than inflation. If you look at inflation adjusted earnings of your savings bank or fixed deposits, you end up with less money than you have.
If you feel you may need cash and want to be able to use it when you need, choose liquid assets. Liquid funds invest in short-term debt and money market instruments such as commercial paper, government securities, certificates of deposits etc. They are relatively safe and can be encashed in no time.
Lesson 9
Catching the tops and bottoms is a myth
No one can time the market consistently and successfully. Don’t be under that illusion or believe anyone who claims continued success in doing so.
Lesson 10
Health is your biggest wealth, make sure you’re covered for medical emergencies
If you are a salaried employee and covered under your organisation’s group medical insurance policy, invest in another policy that suitably covers you and your family. Medical expenses are rising and you never know what the future holds.
All 10 are takeaways from my lived experience. I have gained, lost and learnt from them which I now follow and believe in. You may pay heed if you wish.
The choice, of course, is yours.
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