How to become Confident Investors

Economic crisis, lower GDP, unemployment, bankruptcy, killer viruses, apocalyptic climate change …gloom and despair is all that we are reading of late! To the point, that many individuals have stopped opening the morning newspaper altogether. In this current scenario, how does one instil confidence amongst the young investors or the first timer who are just foraying into the world of investments? Most avenues of investments are seeing some headwinds or the other. The housing markets are at an all-time low, precious metals are too high for comfort, fixed deposits interest rates are so low that they don’t even beat inflation, and the stock markets are as choppy as the rough seas. In all this chaos, it is but natural for a new investor who has some surplus amount to invest but is afraid of the risks associated with all these above investment avenues and hence is staying on the sidelines. Our aim is to assimilate that scared investor in the big bad world of investments, by educating him and making him understand all the pros and cons of each asset class and help him make an informed decision, and in the process help him create wealth for himself as well as for the nation.

In fact just recently a young investor had just approached me a week ago for his financial planning but he wanted to do was park all his money in Fixed Deposits because he considered it the safest of all scenarios where his money would at least not decrease. Well as much as safety should be foremost on your minds, playing safe will not help you achieve your financial goals. Remember the adage “No risk, no returns”. Well it’s true. But this risk should not be blind, it should be a calculated risk which has also to be mitigated by proper hedging techniques. After all your aim of investment should be to achieve Financial independence, and we all know Independence involves struggles.  So are you guys ready to take your first step towards financial independence?  Then lets start.

Here are some pointers which might help an investor start his investment journey with confidence.

  • Understanding your attitude towards Risk – first and foremost you need to understand your attitude towards Risk. How will you react to losing money in the market? There are four categories of investors –
  • 1 – Pragmatists – who believe the world is full of uncertainties
  • 2 – Conservators – who believes world is full is perils and high risk
  • 3 – Maximizers – who believes world is low risk and full of opportunities and just jump into it
  • 4 – Managers –who believe in taking moderate risk but not too risky.

SO determine your category. But if you are young with time on your side, I would definitely suggest to change your attitude if you think you belong to the top two categories.  At this age it pays to take some extra risk, and build an aggressive portfolio rather than a defensive portfolio.  And even if you lose some money, will be able to bounce back in the future and consider this lost money as a learning experience.

  • Take some time to learn – once you have identified your risk taking abilities, try to understand about the products you are planning to invest in. If you are planning to invest in the stock markets then get a thorough understanding of the working of the stock markets, watch the business news channels, read magazines and business newspapers, take classes if you feel the need to. Prepare your ground work. Once you feel confident enough, understand the trends of the market, if you have a particular stock in mind then understanding the company, the sector to which the company belongs, past trends and other parameters such as its financial reports etc. Also it is a good idea to first do paper investing, i.e., do a mock trade on a piece of paper where you buy a share which you like and see how it goes.  Since there is no real money involved here, it becomes more easy to not be emotionally involved in it and look at the whole process objectively.  And once you are confident on paper, you can move on to actual trading.  If however you feel that you are still not confident enough to do the investment on your own, it makes sense to invest in the markets through the mutual fund route.  These are entities who are experts in the subject and will invest in the market on your behalf.  Also don’t just invest in any mutual fund.  Research a little about the fund house, the fund manager, the companies or securities the fund has invested in, the past returns they have given, etc.  And don’t worry, over time you will graduate to investing your own money with confidence.
  • Know your field – it is always better to invest in avenues that you understand and have a knowledge about. So say your family has been in the pharma trade for decade, it is best to channelize the larger portion of your investment in that sector, since you will have the guidance of your family members and it will help you to skip the initial teething problems that a completely new avenue will pose for you.  In fact you can use your knowledge to expand your investment as well.
  • Rational investor and not emotional investor – investment should always be rational and not emotional. The moment, emotions come into the picture, your decisions can get clouded leading to miscalculations or losses. A rational investor is one who understands that every investment is fraught with at least some amount of risk and hence you have to keep it in mind before your investment begins. Also you have to set a goal for your profits and set a stop loss for your losses beforehand, that way you are mentally prepared.  You might argue that a lot is written about Emotional Intelligence and how it is very important and leads to better output. But for that you need to first understand its meaning  – As per the Psychology Today Emotional Intelligence/EO ‘The Emotional Intelligence is the ability to identify and manage one’s own emotions, as well as the emotions of others’. Emphasis on the word manage. Individuals with high EQ have the ability to keep in check their emotions, and hence  make better decisions.  If you cannot emotionally digest the thought of losing your money and they very thought of it puts you into depression, you are not cut out for risky investments.  Invest in less risky assets, because no amount of wealth is worth the peace of your mind.

Take professional help not digital – I once had a client who after every consultation or investments, would call me and say I read on a website that a so called fund is better than the fund we are planning to invest in. I needed to explain to him that as per his needs, the fund we have invested in is much better suited to his style of investing and his goals.  Google babaji is now just a finger tip away literally.  But remember, it is after all a search engine, and so it gives search results for your queries, it does not have you interest at heart.  Also what is good for one cannot be true for everybody.  Everybodys needs are different.  So when it comes to planning for your hard earned money, I would REALLY recommend professional help rather than just relying on digital media. Do not shy away from taking professional help, its not just for the filthy rich, its actually for us who want to live like filthy rich in our own limited set of resources.

Overnight Millionaires – no one becomes Warren buffet overnight. Everyone needs to work hard and be a disciplined investor and always look at investments from a long term horizon. Volatility is a part of investments, ride that wave and you will definitely reap the benefits. Rome wasn’t built in a day.

Start small and invest for long term – take baby steps, i.e., start with a small amount and gradually build your portfolio. Do not go all in at first go. Understand, monitor and learn by keeping a regular tab on your portfolio and churn your portfolio at regular intervals, i.e, weed out the nonperformers and add more of the outperformers. Once you are confident start with bigger amounts.

Don’t put all your eggs in one baskets: Although everyone knows this one but no harm in repeating. A judicious mix of various asset classes spread across various investing genres such as aggressive, defensive, high risk, low risk, high return, low return, fixed assets, liquid assets, etc go a long way.  This way a setback in one asset class wont cause a huge dent in your overall portfolio.

As suggested start small, learn from your mistakes, stay for a long haul and evolve into a confident investor.