Secret 3 of Squirrel’s Corner – guidelines to make your investment life easier, more rewarding and a bit more fun.
This month’s mantra is Invest.
Just because you’re getting on in years doesn’t mean you can stop investing. You don’t plan on stopping eating, sleeping or bathing any time soon, right? Investing is one of those basic things you need to keep doing. Even if your income doesn’t permit too much saving, you will still need to monitor your existing investments. See which ones are doing good, and more importantly, which ones aren’t.
Periodically, you need to re-visit your portfolio and see if it needs re-jigging. What is “periodically”? At least annually. And at most quarterly. And definitely whenever an investment is maturing and needs re-deploying. Any more often and you risk making knee-jerk decisions based on short-term fluctuations, which is never a good thing.
Review your asset allocation while you’re doing so. Asset allocation refers to the concept that every investor should try to have her portfolio spread over most asset classes. Debt, equity, gold, savings accounts – these are some asset classes. Each of them carries different risks and different returns. In theory, those which are riskier should give you higher returns (otherwise what’s the point of the risk). But exactly because they are riskier, they can also deliver sub-par returns, which is what you have to watch out for and prune and trim them in your portfolio, like a good gardener.
Don’t be afraid to take a loss on an investment if you need to get out of it and re-deploy. Think of it as pulling out the weeds. The rest of your garden will grow better and if you re-deploy sensibly, you can make up that loss in time.
There’s a myth that as you grow older, you shouldn’t invest in equity. We recommend you still do for the following reasons: life expectancies are growing and even a sixty-year old has a better chance of hitting her eighties than she did a generation back. That’s a full 20 years of investing to look forward to. Equity has a better chance of beating inflation than debt does. So, a portion of your investment needs to continue in equity so you can benefit from upticks. But only a portion, so that your core portfolio corpus is not jeopardised.
If you can save a bit from your income, do so. Squirrel it away each month and it will come in handy for unexpected needs.
If you come into a lump sum, say from an investment maturity and you need / want to allocate some portion of that towards equity, use the systematic approach. Never, never, never invest lump sums into equity in one shot. Never. Instead, park the lump sum in a safe, liquid option (liquid mutual funds are a good option) and systematically transfer an equal amount each month on a fixed day into your chosen equity investment. There are now easy options where this can be done automatically for you.
It serves to iron out the inherent volatility of equity investing, removes the emotional component and all around makes for less of a roller coaster ride.
This is also where you get to use some of that uncommon ability called common sense. For instance…
Don’t jump into an investment just because someone told you it’s the best thing since sliced bread. Take the trouble to read up about it. Ask for details. Read the newspapers, magazines. And we don’t mean the advertisements. Look for analyses and reviews. Talk to experts, people whose opinion and judgment you trust and who are trustworthy.
Don’t over invest in risky stuff. You need to protect your capital.
Don’t over invest in too safe stuff. You need to compensate for inflation.
Don’t invest only to save tax. Saving tax is the wrong reason to invest. Getting a decent return and protecting your capital are the right reasons.
If someone’s promising you a rate of return much higher than the rest of the world, there’s something fishy going on – what business is he in that can generate those kinds of returns when the rest of the world can’t?
If someone’s guaranteeing you a return in something that is inherently unpredictable (e..g, the stock market), step back.
If someone’s selling you a product you don’t understand, it probably isn’t meant for you.
Investment tips? Tips are for waiters. Make your own decisions based on your research.