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Some of the basics and practicalities of investing I have learned

Majority of errors in investing stem from not understanding basics of investing and straying away from them. While it is still possible to make money in the market without following basics either through special insights or out of sheer luck, retail investors and majority of advisers better not hope to have either.

Investment basics are the result of real life experiences of investors, and decades of historical evidence indicate that sticking to basics is far more effective and reliable approach to investing success compared to other fancy ways.

Here are some of the basics and practicalities of investing I have learned over last 5 and half years of being in this profession that I diligently follow.

  1. Keeping all money required for short term goals (less than 5 years) parked in FD, RD or debt funds. (Adviser looks stupid when he parks client’s short term money in debt and equity performs. Trick is to stick to basics even at the cost of looking stupid.) Small equity allocation can be taken if goal is a flexible want.
  2. Not to go beyond 60% equity allocation for any goal even if it is 30 years away. (While it is highly likely that equity will beat other asset classes over long term, we do not know the exact sequence of return from equity. I do not like to overestimate my clients’ as well as my own ability to stay rational in a bad market condition and therefore I prefer to play it safe. Even if my portfolio underperforms portfolios of those having higher equity allocation, in reality, I will not be worse off.)
  3. Using only liquid and ultra short term funds investing in higher quality papers in debt category.
  4. Sticking with multicap category funds of established AMCs for equity allocation. (Even if these funds just manage to generate index returns with higher downside protection, I am happy.)
  5. Investing according to target asset allocation without worrying too much about what market is doing.
  6. Rebalancing equity:debt allocation if it breaches 5% threshold on either side of target allocation.
  7. In retirement, keeping 15 year’s expense parked in debt at all times.
  8. Not investing or recommending anything that I do not understand well enough. (So a straight ‘NO’ to cryptocurrencies not because I expect it to fail but because I do not understand it well enough.)
  9. Staying within my circle of competence and not venturing into something where my understanding and knowledge is superficial.

I consider it my primary responsibility to avoid mistakes. When I follow basics, I can be sure that I am taking necessary precautions and avoiding classic investing pitfalls. I may still fall into misfortunes, but it will be fault of fate not of my own folly.

Opinions

  1. Post comment

    I have the following assets
    1) 60 L in Equity(30 L in Direct Equity+ 30 L in Equity MF regular)
    2) 60 L in DEBT(PPF+EPF+Gratuity)
    3) 20 L in Bullion(ornaments)
    4) 150 L res + 100 L rented
    5) 5 L in SB for emmergency
    Liabilities
    1)21 L Loan( 18 L Ed loan for son1+ 3 L Home loan)
    Son1 working in US
    Son2 in final year economics in India
    Retirement 4 years away
    Do you suggest any changes?

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    1. Post comment

      Dear Mr. Shrikant,
      It is difficult for me to comment on your portfolio entering into retirement unless I know your expected monthly expenses in retirement.

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