GO LONG THIS YEAR

In­vest­ments made with a long-term per­spec­tive are likely to of­fer bet­ter gains than short-term spec­u­la­tion. Here are some tips for wealth cre­ation

The Financial Express - - PERSONAL FINANCE -

IN­VEST­MENTS made with a longterm per­spec­tive are more likely to of­fer bet­ter gains than most short-term spec­u­la­tion. Much has been writ­ten about the ad­van­tages of in­vest­ing in the long term and its cor­re­la­tion with wealth cre­ation. Peo­ple who in­vest for the long term also be­come a part of the growth of the re­spec­tive com­pa­nies.

Spec­u­la­tors who try and at­tain sub­stan­tial gains over night also face the risk of fall­ing well short of their goals and end­ing up in a dis­mal fi­nan­cial po­si­tion.

Here are some tips and sug­ges­tions that in­vestors should em­brace while plan­ning for a long-term wealth-cre­ation goal. Stick to the ba­sics: One of the most es­sen­tial rule for wealth cre­ation over long term is to al­ways stick to the ba­sics while tak­ing any in­vest­ment-re­lated de­ci­sion. For peo­ple us­ing the eq­uity mar­ket route for wealth cre­ation, it is im­per­a­tive that they in­vest in com­pa­nies with strong fun­da­men­tals rather than run­ning af­ter penny stocks or lesser-known com­pa­nies. Learn­ing to read the fun­da­men­tal quar­terly anal­y­sis and fi­nan­cial re­sults of com­pa­nies also goes a long way in un­der­stand­ing the likely im­pact the com­pany may have in the fu­ture. Another fun­da­men­tal rule re­lated to the ba­sic in­vest­ment tech­nique is to al­ways look out for sec­tors that are more likely to have an im­pact. Since 2014 is go­ing to be an elec­tion year, un­der­stand­ing the party man­i­festos of the likely par­ties to form the gov­ern­ment may give some tips as to which sec­tors are likely to re­ceive a gov­ern­ment-backed im­pe­tus once the new gov­ern­ment is formed.

Don’t make in­vest­ment de­ci­sions on mar­ket sen­ti­ment: One of the big­gest mis­takes most am­a­teur in­vestors make is by tak­ing in­vest­ment de­ci­sions in haste dur­ing a neg­a­tive mar­ket sen­ti­ment. Re­mem­ber mar­kets will al­ways have a up and down ride and a neg­a­tive mar­ket sen­ti­ment should not dis­suade you from a long-term in­vest­ment de­ci­sion. His­tor­i­cally speak­ing most peo­ple who have made a for­tune from eq­uity mar­kets the world over have been all long-term in­vestors who con­tin­ued to show the faith in the mar­kets even dur­ing the bear­ish phases. With the gen­eral elec­tion slated to be held in the first five or six months of 2014, it would essen­tially be im­por­tant to con­trol all in­vest­ment de­ci­sions us­ing a calm head and not flow with the mar­ket sen­ti­ment. For be­ing a suc­cess- ful long-term in­vestor one needs to look at the big­ger long-term per­spec­tive than the smaller phases.

Di­ver­sify smartly: Di­ver­si­fi­ca­tion plays a very im­por­tant part in over­all long-term wealth cre­ation. In­stead of fo­cus­ing on only one set of in­vest­ment, like eq­uity mar­kets alone, the best way is to hold a diver­si­fied over­all in­vest­ment port­fo­lio. In­vest­ing in ex­change-traded funds (ETFs), mu­tual funds, debt funds and real es­tate are some of the op­tions that ev­ery in­vestor must con­sider be­fore fi­nal­is­ing the share for each sec­tor. Even in the eq­uity sec­tor, the com­pa­nies must be se­lected in such a way that ma­jor­ity of the sec­tors that are likely to of­fer sub­stan­tial gains are in­cluded in one’s fi­nan­cial do­main.

In­fra­struc­ture, for ex­am­ple, is para­mount for In­dia’s suc­cess and both the cur­rent gov­ern­ment and the prime Op­po­si­tion party have stressed the im­por­tance of at­tract­ing in­vest­ment in the sec­tor. In­vest­ing in in­fra­struc­ture of­fers a bet­ter chance of at­tain­ing wealth cre­ation in the long term. The se­lec­tion of sec­tors will make a huge dif­fer­ence and im­por­tance must be given to each sec­tor by un­der­stand­ing the mar­ket dy­nam­ics for the sec­tor.

Av­er­age out losses: One im­por­tant as­pect each long-term in­vestor needs to fol­low is the prin­ci­ple of av­er­ag­ing out stock losses over time. If you are hold­ing on to a com­pany share which is dip­ping be­low your pur­chase price sub­stan­tially, sell­ing the stock as a knee-jerk re­ac­tion would of­fer sub­stan­tial loss. A bet­ter way is to keep pur­chas­ing the share at lower lev­els to bring down the av­er­age pur­chase price of your over­all share port­fo­lio for that com­pany. In case you be­lieve in the fun­da­men­tals of the com­pany and its abil­ity to bounce back and per­form in the long term, such av­er­ag­ing out of share prices can in fact be ben­e­fi­cial for bet­ter wealth cre­ation in the long run.

Illustration: SHYAM

AD­HIL SHETTY

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