The probable rules that investors may wish to incorporate in their Rule Book for Investing

Every individual desires additional income. Saving and Investing with Patience (SIP) is a continuous process. Like we say, every dollar should have a job to generate a dollar. Funds lying idle in savings account will not assist the individual to tackle rising prices and inflation. In the process of earning and investing part of these earnings to generate returns, investors make their own rules suiting their own needs. Long term wealth is not built in a short span of time. Here are some of the probable rules that you may wish to incorporate in your rule book –

Make your own rules, respect your rules, don’t break them

First and foremost, rule for investing is to make your own rules and respect these rules during your investing journey. You make your own rules considering risk appetite, availability of funds for savings that can be invested, plan for future needs, emergency payments etc. Rules would differ for every investor. This discipline will keep a check on decisions that you may be tempted to initiate as an investor. Only amend your rules when you are convinced and not based on the influence of someone or some instance or emotion. Ultimately, be it right or wrong, you own the process, and you are the sole beneficiary of the outcome, be it profit or loss.

Practice what you can understand and understand better

Considering that your own money is involved here, you need to first understand the investment product and clear all your doubts. Rather than placing reliance on third parties and regretting later, spend some time to read through all the documents carefully, understand the risk involved, discuss your queries with the institution selling you the product and unless all your doubts are cleared, do not initiate a transaction. While it may be Sellers duty to sell a product, investors are not dutybound to buy this product. When it comes to your own work or profession, you endeavor to obtain proficiency and master the job. On similar lines, when it comes to investing, you need to learn and practice. Focus on avenues that you can understand and practice better rather than mastering all subjects within the investment curriculum. With practice and experience, your ability will eventually improve and you will be confident to initiate decisions.

Define risk appetite

Facing risk during investing journey is like a sailor of ship facing rough sea or tides during sailing. Investors must navigate through these tides during this investing journey with the aim of building a decent portfolio that would act as a catalyst in accumulating wealth. Extent of risk is defined by the investor. Investing is easier compared to holding the same investment (staying invested) during rough times when markets are volatile. In fact, volatile times are better for investing. Buy when there is panic and fear across. Ultimately, the world is not coming to an end. Intention is to invest long term and avoid frequent trades or transactions that may eventually impact or cause a dent on the capital available. Always limit your risk to the extent that you can afford in case prices of these investments drop to the downside. Aim is to build wealth from capital rather than erode capital.

Spend adequate time in learning and review at periodic intervals

Lets take an example, you own a few shares of a particular company. When was the last time you picked up annual report of a company and read through the entire compilation including future business outlook to understand how your company has performed in the previous year and what are the projections for the coming year? How will the company face headwinds in their business and what are the tailwinds that would propel growth of the company? Unless you have a basic understanding of the company’s business and these questions answered, you are placing a bet on the company either based on tip or there is Fear of Missing Out (FOMO). In either case, you are taking a risk and that may affect your capital or savings. Following a tip without analysis is a catalyst to wealth erosion and investing during turbulent times and holding these investments leads to wealth accumulation. Losing opportunity is better than losing money. The pace at which business dynamics are changing globally requires adequate agility to change the course of action and your learning and experience will enable you to take decisions that may benefit you in the long run. Sound financial knowledge is the best recipe for financial fitness.

Fundamentals and Technical Analysis

Fundamentals and Technical Analysis play a vital role in evaluating price movements from time to time. Changes in fundamentals directly affect the price movement as markets are extremely dynamic to factor in price adjustments, both positive and negative. Carrying out Technical Analysis of price movements requires learning and training. Technical Analysis will allow an investor to chart price movements based on historic trends. A combination of Fundamental Analysis and Technical Analysis will strengthen investor’s decision-making ability to prepare for entry or exit in a particular investment. Plethora of content is available on social media portals for learning. Several books are also available for investors to read and learn while they pursue their investing journey. Your unbiased analysis is supreme over any TIP that is being offered. Buy as per your analysis and sell as per your analysis.

Write what you intend to trade (Plan) and follow what you have written

Mind is always active with thoughts. To follow a systematic approach, investor should ideally note down a plan of action and follow this plan. Prepare a list of opportunities that you anticipate and make a choice depending upon the price movement. There may be deviations in the process, but the extent of deviations should be within the tolerance range defined by the investor. Price action demands agility and resilience on the part of investor when dealing with markets. Plan before execution, execute as per plan and monitor as per system, is an ideal plan of action. Failing to plan (raw material) is a perfect recipe for planning to fail (finished product).

Review investment portfolio, compare performance vs benchmark

At the beginning itself, you may choose to decide benchmark that you would follow when evaluating performance of your investment. Intention is to beat the benchmark return and generate alpha (over and above benchmark return). In the process of review, if the investment has underperformed, evaluate causes for such underperformance and decide next course of action. Reason for review and comparison is to improvise performance, thereby improvising returns. Learn from mistakes and avert these mistakes in future. Let these learnings remind you in future when you initiate any decision.

Preserve and review all communications thoroughly

In the process of investing, various communications drop into your email inbox, be it statements, notifications or alerts or messages relating to investments held. Please ensure that you read every such message and notification, keep track of important messages, important dates for payout or maturity and any alerts relating to investments should not go unnoticed. You may wish to have a dedicated email account specifically to keep track of communications relating to investments. Every line item in the statement should be reviewed and queries, if any, should be raised with the institution. Data and documentation were important yesterday, are important today and will be important tomorrow as well.

Plan for reinvesting profits

Have a systematic plan to book profits at periodic intervals and reinvest part of the profits in accumulating hard assets. This is how you can accumulate wealth. Building asset base will equip you to cover liabilities in future. Reward earned and reinvested will generate further rewards in future and this cycle should ideally continue. While reinvesting profits to generate returns, do not miss out to reinvest part of these rewards into improvise your learnings.

The above are some of the rules that you may wish to imbibe and let your investing journey be rewarding and your ability empowers you to navigate through challenges and achieve your desired goal. Wishing you the very best for this investing journey and may this journey be rewarding for you.

The writer is CEO of ZTI Global.

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