The 10 Commandments Of Investing
Don’t time the market, steer clear of greed and envy, and be prepared to wait
Investing smartly sounds harder than it really is. Follow the Ten Commandments of Investing. Legendary investors like Benjamin Graham and Warren Buffet have used these to great success, and you can, too.
#1 — Law of the farm
Warren Buffett famously said, “The stock market is a device for transferring money from the impatient to the patient.”
If you’re confident about your choice, give it time.
Equity investments can take time to show growth. Of course, there’s a chance that the stocks or funds you invest in fail to deliver expected results, but often enough, stocks take time to appreciate in value. Acting in haste to remove a stock from your portfolio may turn out to be a reckless move that you repent at leisure.
#2 — Volatility cannot be avoided
You can’t expect a ride in the stock market to be uneventful. The stock market has always been a volatile space, and this strikes fear in the hearts of potential investors.
But it is precisely this volatility that could be exploited for gain if you follow some time-tested investment principles. You should invest in bearish times. During a bear market, stock prices of fundamentally good companies drop to attractive levels. The stock prices of these companies typically bounce back when the economic climate improves.
#3 — The ‘Best’ Time to invest?
The best time to plant a tree was 20 years ago. The second best time is now.
You can’t (and shouldn’t) wait for the perfect time to invest. There are opportunities everywhere if you’re willing to look. You’ll always find some undervalued stocks even in a bull market. And in a bear market, when inexperienced investors generally avoid buying stocks out of a fear that prices will plummet even lower, you can find great stocks at bargain prices. Take care not to get greedy. You should avoid buying overpriced stocks in the unfounded hope that their prices will go up further.
#4 — Guessing tops and bottoms is a waste of time
Every investor dreams of buying at the bottom and selling at the top. But as all dreams go, this one is near-impossible to achieve. A more realistic and achievable aim is to invest in fundamentally good stocks when their prices are low. Studies prove that staying invested over a stock market cycle and eliminating unnecessary punting is a recipe for a happy investor. It also makes you wealthier in the long run. You are better off studying investment strategy and finding new companies to invest in rather than trying to time the market.
#5 — Take a look at Mutual Funds
Even if you’re not trying to time the market, picking the right stocks is hard work. This is especially the case when you aren’t good with numbers.
This is where equity mutual funds come in. These funds pool capital from multiple investors and invest on your behalf. They’re managed by highly qualified fund managers, offer a diversified portfolio and deliver great returns at a reasonable cost.
#6 — SIPs: The ‘auto-pilot’ of investing
An ideal way to invest in mutual funds is via Systematic Investment Plans (SIPs). A fixed amount is invested in a mutual fund of your choice, on a predetermined date every month. SIPs help you to become a disciplined investor, and reduce some of the stress associated with timing the market.
#7 — Stock valuations vs. stock values
When the market goes up dramatically, many investors end up selling their holdings fearing a market correction. We’ve already discussed how timing the market is futile. These investors often miss out on the opportunity to generate even more gains. Remember to stay invested in a stock as long as the company earnings and its fundamental valuation support the stock price. You should sell your stock only when you feel that its price have exceeded its value.
#8 — Want excitement? Look elsewhere
Fluctuations in stock prices are exciting for some investors, terrifying for others. Your investment decisions shouldn’t rely on these ups and downs. Stick with basic investment strategies. A quick fluctuation in the wrong direction could end up making you exit at a loss.
#9 — Envy — The enemy of investing
Your investment decisions should never be influenced by envy. Avoid emulating the strategies of other investors around you in the hope of making a quick buck. Their goals or investment horizons may be different from yours. Worse — they may have timed their investments well, and it may be a bad idea to do what they did now. Think hard before taking investment decisions and keep your own goals in mind.
#10 — Emergency funding first… Investments later
The basic principle of equity investing is to give up something today for a better future. However, giving up too much can hurt you in an emergency when you need liquidity to pay a hospital bill, for instance, and your money is locked up in a fund. Invest only after setting aside for contingencies. Equity investments may also suffer periodic declines in value. Be patient and your patience will be rewarded in the long run.
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Investing with these principles can go a long way toward building a successful and healthy portfolio. It’s also important to keep policy changes in mind when planning your investments— such as the change in long term capital gains tax. A well-planned investment strategy based on sound principles can grow more rapidly than you think.
