Looking to mint money from equities? There’s more than patience to it

This article was originally written by me for Dalal Times, published on 21 march 2015

Rahul who’s an architect by profession calls himself a great admirer and follower of Warren Buffet. Besides warren buffet theories, he follows many financial blogs, watch business news channels and read yellow newspapers. He doesn’t have any financial background but also doesn’t feel need of anyone’s help in making personal investments.

He started his investments in 2004 and withdrew the whole amount with decent gains in 2006 to fund international vacation trip. This was an achievement for him as almost 70% of his trip’s expenses were taken care by those investment returns.

He re-entered in 2007 and lost almost 50% of his investments by 2009 when he again withdrew his investments with reasoning that “Stock market experts” on television were saying that markets will fall more.

A month later, stock market bounced back, but as he was zero on investments so could not take benefit of that bounce. He again invested in 2010, but went impatient with the slowdown of the economy and sold out all stocks in 2013 and till now waiting for the right time to enter again.

What went wrong in his strategy? When he was so vigilant on financial markets and his habits shows that he must be having good exposure to information then how could he make such bad decisions?

Actually, he doesn’t have any strategy at all. His admiration of Warren buffet and reading and liking business articles and blogs was limited to the rising market and that too only while investing and not selling.

In hindsight it might be very easy for you also to find faults in his decisions, but I am sure many of you must relate to Rahul’s story.

Staying invested for a long time and making money in the process requires patience, strategy and discipline.

Here I put before you few steps which if followed religiously will definitely help you avoid mistakes made by Rahul and make you rich in the process

1. Start investing with a proper structured financial plan

The first and foremost thing to do is start investing rather than just watching and reading the stock market stories. Don’t sit on the fence to wait for right time. This is the right time.

Support your investment plan with a properly laid down financial plan, so you can fix onto some goals be it long term (children education, own Retirement) or short term (vacations, buying new car). Don’t make long term investments in equities for short term goals. Have Diversification and Asset allocation strategies at place.

With a financial plan approach you will not be tempted to withdraw your investments with a sudden jump in the returns and also won’t be worried on the fall of the market as your short term goals are secure.

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2. Automate the investments

Automating investments is very much required to keep your behavior biasness at bay. If you don’t automate investments then surely you would try to time the market and when you don’t find the “right time”, you may miss the regularity cycle.

Go with Mutual funds SIP or if you want to get into stocks then many online broking houses offer SIP route in stocks too.

3. Switch off your Television

If you really want to get rich, then you should consider long term strategy and which is possible when you keep yourself away from the noise and concentrate on the important things. Business channels may sometimes provide relevant information, but becoming habitual to these channels may bring excitement or panic during market movements, and decision making on both sides are not good for your financial health

If some personal finance expert is advising someone on Television, but do understand that your situation is unique and you need a personalized advice. How can you make decisions on the advice given to others? And even if you have adopted the advice given to others, then rather than sticking with it, many times you seek confirmation of your decision which results in watching more TV shows. This way you could not focus on what is important.

4. Keep your luck by your side

No, it’s not about “ Apna Luck pehan ke chalo”.Neither does it mean selecting the next multi bagger or selling before market fall.

Luck here means, escaping the situation which could force you to withdraw your savings or investments. Situations like health problems, unexpected business loss, accidents etc. may sometimes results into withdrawal of personal savings. But these situations can be managed if acted upon timely by taking care of health, regular exercising, following financial planning in business and maintaining required emergency funding, and insuring yourself and your business from uncalled for accidents. ( Read : How much health insurance cover should you buy)

5. Keep increasing your savings

Your Success is a factor of the efforts you put in for how much time and the results you get. Many times people waste their energies on expected results or overestimate the results. Please understand that results are in no one’s hand but efforts are.

This applies to personal finance also, the more money you put in for a longer time frame, the more money you generate due to compounding benefits, whatever the returns are. So rather than focusing on the percentage return you generate, just keep increasing your savings year on year and follow process. You will surely get the desired results.

In rising market everyone likes to hear success stories and tries to replicate the same, believing that anyone can get rich by copying their techniques. But to have a proper understanding on investment process one should learn about the failures too so not to make those mistakes in own investments