Feb 21, 2009

Strategies For Successful Investing

Ensure that your investments are right for you

Different investments suit different people at different stages in their lives. And each one has its own level of risk and reward. The basic rule of thumb? The greater the risk, the greater the potential reward. And vice versa.

It is also important to think about your own temperament – if you find it too worrying that your investment might occasionally go down in value, you should perhaps weight your portfolio towards more secure holdings. Here is a broad description of some investment options:

Gold and Real Estate are traditional investments and due to their 'physical' nature are not liquid. PF, PPF, NSCs and Post Office Savings are long term national savings avenues that help you save for retirement besides offering tax benefits. But when it comes to true blue financial investments, there are three main asset classes: Cash, Bonds and Equities.

Cash is good for an emergency fund or a short term goal like a holiday, but you may find the returns disappointing over the long term, and you need to remember that their value will be eroded by inflation.

Bonds (or loans issued by the government and large companies) can provide better returns than bank accounts but cannot offer the same level of security. Although bond funds do not have as much growth potential as stock market investments, they tend to be less volatile. Investors often opt for bonds when they need to reduce risk – perhaps in the years leading up to their retirement.

Equities offer the most growth potential over the long term, but you need to accept that there may be periods when the value of your investment falls sharply.

As the years go by, it is important to check your portfolio regularly to make sure that it still suits your long term strategy. If an investment has done particularly well, you may find that it now accounts for a disproportionate share of your overall portfolio and you need to do some rebalancing. In addition, you will probably need to adjust the weights of your investments from time to time – for example, reduce the amount of risk you are exposed to as you get nearer to retirement.

Keep calm
If you are confident about your long term strategy , you do not need to react to short term movements in the market. You will know that your investments have time to ride out the storm and perhaps even go on to take advantage of any further growth. It is important to be patient with the stock market and to avoid knee-jerk reactions and rash decisions in response to worrying news.

“The worst mistake a private investor can make is to be sucked into markets when they are high and the prevailing mood is the most optimistic, only to then get shaken out at times like this when prices are falling and the outlook is uncertain. It normally takes many years to recover from this experience.”

Read: When is the Best Time to Invest? >>



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