Secret 5 of Squirrel’s Corner – guidelines to make your investment life easier, more rewarding and a bit more fun.

This month’s mantra is Evaluate.

We’ve alluded to this over the last few articles but we think it’s so important and so often not done that we thought it worth emphasizing.

Make your investment decisions and your signing decisions after a process of evaluation. What does this mean?

Nothing more complicated than: take the time and make the effort to think about what you’re doing and why you’re doing it.

You don’t have to get into fancy calculations and charts and spreadsheets and stuff. Follow a few simple steps and ask yourself a few simple questions:

1. Why am I doing this? What am I looking to get out of it / to earn?

2. What time frame am I comfortable with? Am I looking for something for the next 6 months or the next year or the next couple of years or in the next decade or so?

3. Do I need the liquidity? Am I ok if my funds are inaccessible to me for some time (and/or am I willing to pay an extra cost to release the funds)?

4. How much risk am I comfortable with? Am I okay if a bit of my capital gets lost? Can I hang in there if there’s a good chance I can recover it back? Do I want to?

5. How easy is this whole process of investing and selling? Is everything in my name? Why does this other guy want signing powers on my account? Why is the cheque to be made out to X, Y or Z when I’m investing in A, B or C?

6. Who am I giving the money to? What’s their track record? How large / small are they? Are their accounts and dealings transparent? Are they governed by an independent regulatory authority like SEBI or the RBI?

7. Why is this company offering me 15% when the market rate is 8%? What kind of business are they in that allows them to pay that much extra? Are they desperate for my money? And if so, isn’t there a greater chance of my losing it?

8. Who am I making the executor of my will? Can I trust them with my children’s lives? Should I?

Make a conscious effort to cut out or at least reduce the emotional component of arriving at a decision. These kind of decisions should be made rationally not emotionally. Some emotion (usually trepidation and / or greed) usually creeps in. Be conscious and aware and look for rational reasons to do or not do whatever it is.

These are good ‘life hack’ guidelines – rules to live your life by generally – but when it comes to investing they acquire even more importance.

Too often we let our investment decisions be ruled by sentiment. Either our own sentiment (“real estate always makes money because even if I can’t sell it I can lease it out”) or market sentiment (“the stock market is crashing! Let’s sell!”). Quite often (usually?) sentiment is wrong. To take the two examples quoted: one can’t always lease out property profitably – that depends on a host of factors most of which are not in your control; and when the market is down, it’s generally a good time to buy especially if you have a long term horizon in mind.

Which is not to say that rational decisions always work out. But at least you have the mental satisfaction of knowing that you did what you did for a good reason. And, at least in investing, rational decisions do tend to work out over time.

Let’s recap. If you’ve been reading our last few posts (and paying attention) you may have noticed a theme:

Simplify (as much as you can)

Manage (take the trouble to, good things don’t happen automatically)

Invest (don’t stop)

Legacy (be mindful of yours and make it easier to manage)

Evaluate (rationality over sentiment always)

Which adds up to the acronym SMILE. No coincidence.