How to invest for good returns

Investments have always been associated with being astute and possessing good luck. No investor can guarantee exceptional returns from any single investment. That is the reason intelligent investors diversify their funds available for investing. By spreading the eggs in the basket, the risk of loss from money being concentrated in one asset is reduced to some extent.

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Investments are affected by various factors such as age of the investor, investment goals, purpose of investment (speculation versus long-term appreciation), income level, consumption level, saving rate, discretionary income level and risk appetite. Each investor is an individual specimen, different than the rest. It is not common to find two individuals with similar investment goals, risk capacities and earnings and savings level.

Here are some tips to invest for good returns:

1.    Keep a calm mind: The secret to sane investing lies in the cool-headedness of the investor. Being swayed by market highs and lows, investors often lose their cool and take rash decisions to buy, sell or hold a security. Incorrect market timing can make you lose rather than gain. It is important to not be in a rush to take decisions, and also remember that in the long run markets stabilise after short-term frenzies caused by external events.

2.    Have clear goals: Investing gets successful when started with clear objectives. Imagine a college student investing in real estate and then struggling for gaining liquid cash. Or a pension-holder investing in junk bonds because they were available at low prices. The ensuing fluctuations in prices would surely disturb the latter. Each investment should be a thought out plan as there are many assets available to choose from.

3.    Measure risk: The risk-taking ability of every individual investor is unique. There is no standard measure or generalisation available for measuring risk appetite. A small income holder could believe in taking high risks for higher returns; while a wealthy high net worth individual may consider taking high risk unnecessary. He may believe in capital preservation and stable appreciation. Assessing risk is the primary method of investing for good returns as it is the first step of planning and analysing future investments.

4.    Diversify: A direct benefit arises from diversification of investible surplus across many asset classes. In case one asset fails to deliver expected returns, another asset may exceed expectations. And the overall return expected can be achieved. All investments are a game of expected versus actual returns. Diversification is the key to minimise losses and maximise returns.

5.    Avoid speculation: Demat account opening has become simplified since dematerialisation of shares in 1996. However, this has also led to higher levels of speculative traders entering the market. While speculation could lead to high returns in the short term, it is a very risky strategy. Speculation is akin to gambling and involves volatile investments. It is advisable to be a smart investor and aim for long-run capital appreciation.

6.    Acquire knowledge: The subject matter of investments has become vast with the explosion of communications and media. There are various sources of gaining a wealth of information on the subject: books, business magazines, periodicals, television shows, etc. A smart investor never stops learning newer tricks to the trade. Even renowned investor Warren Buffet advocates the learning process.

7.    Perseverance: Investment strategies are fluid and keep altering as per market movements and other external factors. An intelligent investor knows the importance of perseverance in the investment cycle; it could take time for returns to reflect in your portfolio. To persevere is probably the top attribute required for investors.

8.    Plan strategies: Successful investors brainstorm and plan about entry and exit strategies. There are always possibilities of loss or gain in every investment, and the smart investor knows exactly what time to enter or exit from an active investment. Knowing when and how to exit from a loss-making investment is an important way of preventing escalation of losses.

9.    Study trends: Investment vehicles all have historical trends that investors must study and analyse to derive observations. These would aid them to plan focussed strategies related to their fund allocation and asset selection. Technical analysis is important to get higher than average returns. This is why specialised professionals are hired for monitoring closely the highs and lows involved historically in an asset and also to predict future movements and plan investments accordingly.

10.    Relearn: Despite taking all the necessary efforts, time and energy to master fund allocation strategies, your investment could still fail. A successful investor takes failures in his stride and attempts to relearn from his mistakes. Every student gains a higher understanding of the subject after facing failures. The same concept applies to investments. Relearning could garner the best insights as they are individual experiences. No secondary source such as a book or TV show could replicate what one learns from his own mistakes.


Jason B. Barker