The Top 10 Tips for Successful Investing

1. Start Early - the sooner you invest, the more time your money will have to grow. If you delay, you will almost certainly have to invest much more to achieve a similar result.

THE DIFFERENCE TIME CAN MAKE

If you started investing Rs 5,000 a month on your 40th birthday, in 20 years’ time you would have invested Rs 12 lakhs. Growing at an average of 7% a year, it would be worth Rs 25,52,994 when you reach 60. If you started investing ten years earlier, your Rs 5,000 each month would add up to Rs 18 lakhs over 30 years. Assuming the same average annual growth of 7%, you would have Rs 58,82,545 on your 60th birthday – more than double the amount you would have received if you’d started ten years later! The bottom line - your investments gain most from compounded interest when you have time on your side.

2. Keep some cash aside – it is always a good idea to have some money set aside in case
of emergencies. Enough to cover three months’ living expenses is often a rough guide to how much you need. And make sure you can withdraw it when you need to, without penalties.

WHY YOU MAY NEED YOUR MONEY AT SHORT NOTICE:

• making a major purchase
• taking an unplanned holiday
• for an emergency such as sudden hospitalization

3. Ask yourself how much risk you can take – there is no point having a stock market investment if you are going to lose sleep every time share prices go through a rough patch. It’s vital that you are realistic about your appetite for risk – an Investment Adviser may be able to help you decide how much risk you can tolerate.

"In many ways, the key organ for investing is the stomach, not the brain. What is your stomach going to do when an investment your brain selected declines for a year or two?"

4. Bear in mind that inflation will eat into your savings – returns on risk-free cash investments may sound respectable, but when you subtract the current rate of inflation you may not be so impressed. For significant long-term growth you need to make your money work harder.

INFLATION - THE TICKING TIME BOMB

If you have Rs 10,000 in a savings account earning 3% interest each year, in 20 years time, your savings would be worth Rs 18,061. That’s a return of just over 80%. However, if inflation is
about 7%, Rs 18,061 would only be worth Rs 4,668 in today’s terms!

5. Think carefully about how long you will be investing for – only look at the stock market if you are prepared to put your money away for five or ten years, or perhaps even longer. If you are likely to need your money any sooner, keep it in a lower-risk investment so there is less chance of a fall in value just before you make a withdrawal.

“If you’re going to need money within the near future to put a down payment on a house — the
stock market is not the place to be. You can flip a coin over where the market is headed over the
next year. But if you’re in the market for the long haul — five, ten or twenty years — then time
is on your side and you should stick to your longterm investment plan.”

6. Spread your money across a range of investments – it’s rarely a good idea to have all your eggs in one basket. Depending on your goals and attitude to risk, you will probably want
to spread your money across different types of investment – equities, bonds and cash. You may also want to diversify within each of these categories. An equity fund, for example, will invest your money in a variety of companies but you may want to ensure you have a range of industry sectors too.

ADVANTAGES AND DISADVANTAGES OF THE VARIOUS ASSET CLASSES

CASH – ADVANTAGES
• High security and liquid
• Interest will always be paid
CASH – DISADVANTAGES
• Interest rates vary
• Best rates often have restrictions
• May not beat inflation
BONDS – ADVANTAGES
• Fixed interest paid regularly
BONDS – DISADVANTAGES
• Bond issuer may default on interest payments
• Value of a bond may fluctuate
EQUITIES – ADVANTAGES
• Equities can increase significantly in value
• Can outperform other asset classes over the long term
EQUITIES – DISADVANTAGES
• Equities can also fall significantly in value
• Difficult to predict what will happen in the short term

7. Invest regularly – investing regularly can be a great way to build up a significant lump sum. You will also benefit from what is known as rupee cost averaging. This means that, if you are investing in a mutual fund, over the years, whether the market goes up or down, you will pay the average price for units.

8. Choose your funds carefully – you should select investments based on your personal
circumstances and goals. If you are investing in a mutual fund, don’t opt for the flavour of the month, unless you are sure it will be right for you in the future. Don’t assume all funds investing in Indian equities are the same – look at what a fund invests in and check if you are comfortable with its investment style and objectives.

9. Remember that time not timing is the key to successful investing – when planning an investment, it can be tempting to wait for the market to drop. But you run the risk of missing out on the rises that often occur in the early days of an upward trend. In Fidelity’s experience, even the experts cannot “time the market” consistently well. It is better to choose an investment that you feel confident about and take a long-term view, so that you have time to ride out any ups and downs.

10. Review your investments – a portfolio that is right for you at one point in your life may
not be quite so suitable a few years later. Your investments need to adapt to changes in your circumstances, such as getting married, having children or starting a business. It’s also a good idea to check that each of the funds in your portfolio is living up to your expectations. Talking to an Investment Adviser could help you decide whether you need to switch money between funds.

GETTING THE RIGHT MIX

For the greatest long-term growth potential you could invest all your money in equities. But this could be a high-risk strategy as the markets could dip just before you need the money. You may need to think about making changes to your portfolio over time. You could aim for strong growth in the early years, and then, lock in gains you may have made and move into lower-risk investments. As you get closer to needing your money, bonds and cash investments could be your emphasis.

How retail investors lose money

The reason is simple - a retail investor is driven by greed or fear. Never logic.

• Retail investors are always the last to enter a bull run
• "Smart money" enters markets long time back when markets are at its bottoms, there is frustration all around and no one wants to discuss markets
• When markets start booming and indices make new peaks, the retail investor "wakes" up. At this stage, he is still not sure and is a fence sitter.
• Lastly, there is optimism all around. Every one is bullish and talking markets. Stocks which were never traded in a year, suddenly start moving and start reaching "new highs"
• At this time, the retail investor starts buying as he does not want to miss out the "action"
• The retail investor will display a marked preference for "low priced" stocks because these are "cheap". He will stay clear of index stocks as these are "expensive"
• This is also the time when "smart money" starts moving out
• When a correction happens, it is usually quite severe
• The retail investor does one of two things. He either decides to wait (the optimism is still there) or he starts "averaging" his costs. Averaging is nothing but trying to "catch a falling knife"
• At some time or the other, panic sets in. The retail investor will then sell off all holdings as a distress sale.
• Sometimes the retail investor will do nothing but wait for the markets to rise
• When the markets do rise, he will sell off all his holdings at the first available opportunity and thus miss out on the new bull run

Interesting facts you may not be aware of

• About 80% of retail investors in public issues sell their allotments within a week of listing. No one will wait and let their investment appreciate
• In a bull run, the retail investor is usually the first to sell off his holding. This investor seldom waits for the bull run to continue
• Those who have never participated when the rally started will invariably jump in towards the end of the bull run
• Whenever a fall happens, the retail investor is the first to buy as he does not want to "miss this chance" to buy a stock
• Retail investors hate to take a loss. Circumstances eventually force them to take a bigger loss sometime or other
• Lastly, retail investors rely on tips or broker advise and sometimes, company research when buying. This never works because the market has already discounted this news

Conclusion

Follow the trend for profitable investing

Creating a Financial Future - Putting Your Plan Into Action ( Part 1 )

Putting the plan into action is what implementation is all about. It's one thing to have goals, but without concrete steps to achieve them, they remain dreams. The last column discussed measuring the money required for each of these goals. Now it’s time to figure out how we’re going to put that money together.

Of course, the first step is the obvious one. We must have a source of income. This could be a salary, an endowment, or even a loan (although we’d normally advise against that last option). One might consider multiple sources of income. This protects against undue dependence on one source.

Assuming that some income exists, we can begin to make plans for saving. Based upon our analysis, we can determine how much must be saved on a daily, weekly, monthly, or annual basis to reach our goals. We can then consider if it is possible to grow the money fast enough to reach our target date.

If, in the end, we find ourselves unable to save adequately for our goals, we must consider that the problem may not be in our plan, but in our income levels. Sometimes it’s simply a matter of recognizing that goals may be unattainable without adjusting income levels. This might involve second jobs, or side businesses, or rather may require stepping back from the current situation entirely, and increasing employability through education or training. Furthermore, it might suggest that new, creative ideas should be considered. Alternatively, it might simply involve selling off unproductive assets. Whatever the case may be, the income level is a crucial part of any financial strategy, and one often overlooked by investment professionals.

Finally, once the income levels and saving decisions have been established, we turn to the final component: the investment strategy. The final strategy may include many different types of investments, and use many different types of methods, but in the end, it should always be focused on the goals.

For example, if the goal is to purchase a house in 1 year, investing in stocks may not be the optimal strategy unless you intend to take a great deal of risk. On the other hand, if you plan to purchase a house when you have earned enough money, but plan to remain flexible regarding the specific time, stocks may be more viable.

This brings us to the consideration of asset types. This is one of the most critical decisions to make. There are at least a dozen different types of assets to choose from. Some of the most popular are:

- Stocks Mutual Funds Real Estate Limited Partnerships
- Art & Collectibles Gold/Commodities Bonds Insurance
- Businesses Derivatives

Of course, this list could go on, but we’ll focus on some of these. First, let’s dispose of the easy ones. Investing in a Business can be a great choice for someone with a solid business plan and sufficient time and capital to make it work. However, many businesses require a full-time commitment, and unless one is able to give up their regular income, it can be a problem. It is possible to start a business part-time, depending on the type, and this may be an option for some. Additionally, one could invest in someone else’s business, but here one must be concerned with issues of honesty, compatibility, and incentive. Finally, investing in a business carries with it liquidity problems, because one cannot always sell a business for what its worth without first locating an ideal buyer. Thus, if you’ve planned to sell at a certain date, in anticipation of reaching a goal, you may have trouble.

Limited Partnerships carry with them unnecessary problems, largely because there is not a great market for these either. Thus, even when they have value, one may not be able to sell them easily. In this way they resemble investing in small businesses, and carry the same risks.

Insurance truly should not be considered an investment, but I include it here because it is so often sold as an investment. In many ways, it can help one plan for tax considerations, but as a pure investment, it is a non-starter.

Art & Collectibles can sometimes increase in value over time, and for those with specialized knowledge in a certain area, it may be a wise speculation. However, much like running a business, it takes time and energy, and has liquidity problems. Still, these can be a small proportion of a portfolio for some investors.

Commodities are bulk holdings of any uniform item for which all have a uniform value. This would include oil, orange juice, coal, silver, or pork bellies. Gold is a commodity with unique qualities because of its long history of use as money and reputation as a dependable store of value. All commodities have fluctuating prices in common, and those who invest in commodities generally have an intimate knowledge of the market for that specific good. Over 90% of people who invest in commodities lose money, while the experts generally make a comfortable living. Investing in commodities can be extremely risky for those who do not have specialized knowledge.

The Benefits of Managed Futures

Modern Portfolio Theory allows investors to estimate both the expected risk and returns, as measured statistically, for their investment portfolios. A portfolio's risk can be reduced and the expected rate of return increased, when assets with dissimilar price movements are combined. Diversification reduces risk only when assets are combined whose prices move inversely, or at different times, in relation to each other.

While the technical underpinnings of the Modern Portfolio Theory are complex, its conclusion is simple and easy to understand: A diversified portfolio, of uncorrelated asset classes, can provide the highest return with the least amount of volatility.

One of the most uncorrelated and independent investments as compared with stocks and bonds is professionally managed futures.

"Portfolios...including judicious investments...in leveraged managed futures accounts show substantially less risk at every possible level of expected return than portfolios of stocks alone"
Dr. John Lintner, Harvard University

The term managed futures represents an industry comprised of professional money managers known as commodity trading advisors (CTAs) who manage client assets on a discretionary basis, using global futures and options markets as an investment medium.

Managed futures, by their very nature, are a diversified investment opportunity and they provide direct exposure to international financial and non-finanancial asset sectors. Trading advisors have the ability to trade in over 150 different markets worldwide.

The benefits of managed futures within a well balanced portfolio include:
- opportunity to reduce portfolio volatility risk
- potential for enhanced portfolio returns
- ability to profit in any economic environment
- ease of global diversification

Learn The Tricks of The Traders

ARE there bargains to be had in the stock market? Anyone who invests in shares would like to think so. Buy low, sell high is the ultimate goal of all investors. Not everyone, however, has the time or inclination to analyse every share they might buy. Nor do they have to. A number of Wall Street traders have long put their faith in simple axioms that can point to value in the market. They are so straightforward that anyone can do the same. The recently published Beyond the Random Walk: A Guide to Stock Market Anomalies and Low-Risk Investing by Vijay Singal, a professor at Virginia Tech, gathers many of these adages together. Savvy investors can significantly boost their profits by taking advantage of market inefficiencies, says Singal -and many Irish analysts agree with him. Here are seven indicators that can alert investors to the fact that the stock market is not always as efficient as it should be when it comes to reflecting the fair value of shares.

Index Changes

When firms are added or deleted from an index such as the S&P 500 or the FTSE 100, fund managers who track these indices are forced to buy the stocks being added and to sell those being dropped. Accordingly, the share price of firms being added usually rises, while that of firms being dropped usually declines. The rise or decline begins on the announcement date and continues until the effective date. A recent study showed that shares added to the S&P 500 rose by an average of 6.4% when changes to the index were announced, and had advanced another 3.7% by the time the changes were implemented. Those removed lost an average of 4.2% on announcement date and another 6.2% before the changes became effective. After this, however, new firms tended to give up some of their gains and deleted firms usually regained value. Savvy traders are wise to these trends and profit accordingly. Patrick Sexton, of Fexco Stockbrokers, says that firms being added are on a "strong upward trend anyway" and are likely to be good growth candidates, but the theory, he believes, may have become a victim of its own success. "Nowadays you have to move faster because people have seen the pattern. Look for stocks likely to be added and move in advance of the announcement."

Merger Arbitrage

It sounds posh, but it's pretty simple. When a merger or takeover is announced, the price of the company being acquired doesn't actually rise as high as the price being offered. Why? Because there is always a possibility the deal will fall through. Research shows, however, that the difference in price tends to be larger than it should be. Singal says investors can earn returns of 4%-10% by buying the target and shorting the acquiring company between the announcement and the closure of the deal. Shorting involves selling shares you don't own in the hope of buying them back at a lower price. Pramit Ghose, head of investment strategy at Bloxham Stockbrokers, says that merger arbitrage "generally works but may not be a worthwhile arbitrage for private investors as the percentage gains are too small". Spread-betters can circumvent this problem and make sizeable gains by gambling on small percentage moves in share prices. Option traders, who trade the right to buy or sell shares at a specific price during a set period of time, can do the same. Such activity is not for the faint of heart, however.

The Weekend Effect

History shows Friday to be the stock market's most positive day and Monday its worst. Therefore, Friday is the best day to sell, Monday to buy. Again, however, minute profit margins make this strategy more suitable for spread betters. Sexton has exploited the weekend effect in the past but warns investors of some obvious exceptions. "Don't try this on stocks tipped in the Sunday papers. They tend to be marked up come Monday morning," he says. It's also worth noting that when a downward Monday follows a downward Friday, it may be time to run for cover. Six out of seven times that this happens, shares will fall even further within five days.

Short-term Price Drift

Sometimes news or events that cause large changes in share prices take time to be properly priced in. Singal recommends buying shares that have gone up significantly and shorting stocks that have fallen noticeably before unwinding these positions over the next month. Singal's research shows that such a tactic can yield annual returns of 15%-36%. A good example of short-term price drift is Elan. In 2002, when the firm faced questions concerning its accounting procedures and its Alzheimer's drug, its share price suffered a sudden drop. As the market attempted to gauge the exact significance of these developments, the decline continued. By 2004, the company was able to release positive data on Tysabri, its multiple sclerosis drug. The share price immediately leapt, but continually updated analyst estimates and improved market sentiment meant the share price continued to rise. Of course, the stock recently capitulated once more, following the shock withdrawal of Tysabri from the market. Singal's theory would suggest that Elan shareholders will continue to suffer short-term pain, a viewpoint shared by Stuart Draper, head of research at Dolmen Butler Briscoe. "Elan will probably be significantly higher in a year's time but we are not recommending the stock to our clients," he said.

The December Effect

Shares that have done well in the January-November period are likely to continue on their merry way. Investors holding winners are loath to cash in, as this results in taxable capital gains. By waiting until January, these taxes can be postponed by almost a year as the CGT won't be due until the following October. With little selling pressure, it is easier for these stocks to continue appreciating. Sexton suggests that investors may profit further by postponing any planned sales until February. "Historically, December has been the second best month for the stock market. January is the top performer."

Stock Splits

These occur when a firm increases the number of shares it has. If you own 100 shares of XYZ at E20 per share and there is a 2-1 stock split, you would then own 200 shares worth E10 each. You might ask: isn't this irrelevant? Theoretically, yes. But although splits may not seem important, they tend to affect psychology. A lower share price can entice new investors, for example. Splits are usually undertaken by successful companies that have seen a rapid rise in their share price. Issuing a split draws attention to this success, generally resulting in increased buying. Announcement of a forthcoming split usually gives the stock an immediate boost. As the split date nears, the price is usually bid up further, before retreating after the split becomes effective. A stock split alone should never entice an investor into buying shares. Nevertheless, the odds of short-term gain invariably increase when a company declares an ensuing stock split. Draper sees splits as an excellent sentiment indicator that "usually, if not always, occurs in companies that are getting things right". Ghose says splits generally work and adds that "buying a stock just before it goes ex-dividend can also be profitable". There are a host of other stock market anomalies that the canny investor can exploit: the so-called Santa Claus rally that tends to cheer Wall Street at Christmas; the underperformance of the market in the summer months; and the usually stellar performance of the market on the day before St Patrick's Day.