6 (Financial) Commandments for 2013!!!

2013 is here. Like the current Bollywood trend we thought of penning a sequel to our article “Mistake to avoid in 2012”. Here goes

2012 has ended on a much happier note for the investor --and rightly so after being “dented” throughout the previous year. 2012 was a year which saw record inflows into fixed deposits which was facilitated by outflows from equities. It was as if equity had become the dirty word. This perception was also perpetuated by a languishing economy and a dull outlook on the inflation front.

Time and again, investors make the same mistake—buy high sell low. Though history tells us that In the long run, markets do not sustain at either overvalued or undervalued levels rather move close to fair values. This is why investments made in adverse times typically yield above average returns and vice versa—this is one lesson that the Indian investor has not yet grasped—but faithfully followed by FIIs. (Read why investors do not make money)

So what is it that we ought to have practiced in 2012 also but did not? And what is it that we should resolve to follow in 2013 and thereafter? We give here below our 6 commandments for 2013 which we believe will hold us in good stead in the year(s) ahead.

1.   Thy shalt not trade:-

We often hear stories about how a person striking a pot of gold by trading on stock market. You must have been advised by your advisor to exit from a mutual fund scheme while it is making say 21% CAGR and move into some other fund. We more often than not tend to forget that “it is not your thinking that makes big money. It is sitting.” Differentiate between long term investing and short term trading. Rs. 1 lac cannot become Rs. 50 lacs through trading! Long term investing is the only route which can multiply your investments.

2. Thy shalt secure your family first

Every investment activity is done for family and directed towards their secure future. The first recommendation a financial planner makes is towards health and life cover of the investor. An adequate health and life cover forms the basis of every financial plan/strategy. After all health is wealth. A medical emergency for example can be a disaster for your financial well-being if you are not adequately covered.Read:- 5 things to do with your money

3    Thy shalt spell out your goals

An investment is not an end in itself, but is rather a means towards the end. The “end” referred to here are your “goals”. Ask yourself first before filing out an application form “why and for whom am I investing”? Will this investment help you meet your life’s goals? An investment without a specific goal is like a journey without a destination. Practice goal based investing. It’s your safety belt in your driving around in the investment world.(Read:-Right Way)

4    Thy shalt avoid information overflow

Do not be guided by free advice floating around in the business channels and pink papers. Since the advent of internet and business papers, nobody has become a millionaire following the advice of “stock gurus” who dole out stock tips in dozens. Though, records say that billionaires have in fact become millionaires.

5    Thy shalt focus on wealth creation, rather than on making money

Investment is not about making money. It is about creating wealth. Like Rome, wealth will not be created either by trading or in short term. Remember, investments are done so that they can be the 2^nd. earning member of your family when you stop earning. To give you an example of the growth that Equities (mutual funds in particular)—Rs. 10,000 invested in HDFC Equity on 01/01/1995 would be worth Rs. 2, 76,571 as on 30/11/2012---despite all the wars, famines, floods, scams, assassinations ET all Do we have any data to suggest that the following 20-30 years will be any different?(Read "yahi hai right way to create wealth)"

6   Thy shalt spend time with your family

Do take time out for your family. Go on a vacation once in a year—where there will be no mobiles, or client meetings to worry about. It is said that a family that eats together stays together.  It has been rightly said that a man can face the rigors of life if he has the support or backing of his family. After all is the “family” not the reason why you work so hard?

                                                                                                                               

Wealth creation is long journey without any guiding posts. We should invest in companies or Mutual Fund schemes with a clear focus on our goals and our resolve to meet them. Equity as an asset class will deliver inflation adjusted returns but over long term. This “long term” has to be calibrated to your goals. According to an interesting study done by a prominent foreign AMC, it was shown that over the last 16 odd years, there have been almost equal numbers of good bad quarters as far as equity returns are concerned. So theoretically, market (sensex) should be still trading close to 3000 levels. But it is trading at 18000 levels. And that’s how you create wealth with zero tolerance to loss.

Wish you all a very successful 2013—financially.