There’s nothing emotional about it!!!
Are you someone who is invariably emotional? Feeling a sense of attachment to every other belonging that you have? If your answer is in the affirmative then maybe investments in risky instruments like stocks and derivatives may be riskier for you!! This is because feeling a sense of attachment to your investments might be the biggest threat to your investment plans itself!
Investments in Equities, derivatives and other such instruments entail a big element of risk. If you don’t know what you are getting into then you might get yourself into a lot of trouble. So when the decision has been taken to enter such investments it is better to be prudent rather then getting emotional!
Let me explain how!
Let’s say you bought a share of a company ABC Inc. at $50 a share based on a “hot tip” that the shares will touch $70 in 3 months time. After 1 month the price of the share of ABC Inc. tumbled to $45 and within the next 15 days it goes down to $39. You continue to hold on to the share in the hope that it will bounce back to original level and also grow further.
This is an example where the concerned investor showed emotion rather than prudence.
In this second scenario, let’s assume the shares of ABC Inc reach the promised $70 in the next three months. You had bought the shares at $50 so you are now set to make a gain of a cool $20 per share. But somehow this gain is not enough for you and according to your ‘research’ it may climb up to $90 in some time. So you decide to hang on to the shares.
Well there’s nothing wrong with such a strategy only if it is backed with reason and sufficient substance. But then you had ‘researched’ for its estimated price and everywhere found that the shares have potential to climb, isn’t it? There lies the biggest flaw as in our emotion to believe in a certain line of thought we tend to look at only those details which affirm our inner view rather reading at those fine prints which subtly warn us about the storm ahead.
Instead of searching for views affirming our stand, if points of argument and contradiction are focused upon then I am sure a much better decision would follow which has considered most aspects regarding the issue.
The above two points of argument illustrate two common cases when emotions tend to take the driver’s seat!! Classic scenarios of emotions running wild are when the markets take a plunge fearing some danger or create new climbing records anticipating positive ‘news’. This is when many an investors tend to lose focus and get carried with the tide losing everything in the process. The shrewdest investors tend to make money when the crowd is running out of the market because they anticipate the storm and plan for it accordingly.
Concluding, I would like to emphasis that emotions never mix with investments. So if you have decided to take the plunge with your hard earned money it’s much better to be wise and take the decisions based on hard facts rather than pure emotions because you never know when the storm blows you and your money away!!!
Where to Invest?
In this second part of the series on Investment we discuss the various avenues of investments where one can park her money for good use.
We have already seen the importance of investments and how it is a great tool for making your money work hard for you. Now let’s look at the options that are available for us to do that.
The nature of investments one chooses depends on two factors:
If you noticed both the factors are closely linked as a high risk investment option would have the potential to give high returns (or high loses) while an assured return would be promised only by an investment option which isn’t much inclined to risk taking.
So before one is certain about the nature of investments one wants to make, the risk appetite and the investment goal should be made clear first. Ask yourself:
Once you are sure about your answer to these questions, you can move onto deciding which investment plan you want to go ahead with. The market provides investment option for every risk appetite category.
Investment options available in this category are Bonds offered by stable governments, Other Debt instruments where in a party borrows your money and promises an assured sum after a fixed period of time. Such instruments offer low returns on money but the returns are virtually guaranteed.
If the answers to most of the above mentioned questions are in the negative then this option suits you the best.
The instruments in this category love to take risks and compound money in leaps. It consists of instruments like Equities, Derivatives, Forex trading etc. These instruments have much more rewarding potential than the other instruments discussed as they are not at all risk averse. Practically they don’t assure any returns and if your luck is really bad even your principal may vanish in thin air. But that’s not the case always. As I discussed in my last article these instruments must be handled with care and you must know what you are getting into. Moreover they require time and effort from the investor to provide good results.
If the answers to any of the above mentioned questions are in the affirmative then you surely are not risk averse, go and choose this option as your medium.
I call it the moderates as the instruments under this category provide the middle path of the other two categories. It consists of a marvelous option called Mutual Funds. This Instrument is a highly flexible investment option, which provides the elements of both the worlds. Many types of funds available in the market take your money and either promises you steady income or high returns depending on the risk taking capability of the fund.
They neither require your time or effort from your part for your money to grow. Needless to say the fund managers take a part of that investment from you as their fees. Most mutual funds, given time and if managed properly give handsome returns to the investors.
All the instruments discussed above have been designed for capital appreciation and what suits an investor’s needs is a totally personal decision. Whatever investment decision an investor makes a positive attitude and an emotional detachment from the investments goes a long way in deciding the success one has. But more on this later!
Having mentioned these options I would like to reiterate that these are only my views and an attempt to explore the wide world of investments and it might not be treated as exhaustive under any circumstance. It’s only an attempt to get things started with those who might have a negative view on investments or for those who might still be searching about where to start.
If you found this article helpful do post a comment or two about what you thought about it
Investments, Equities, Stocks had always been nothing more than a curiosity for me. The whole idea seemed so elitist. The newspaper banner headlines street shouting the butchering of the common investor didn’t help either.
But things took a turn for the better when I first heard about Warren Buffet (see picture) and how he became World’s then second richest man mostly through his investment business. (He is now the World’s richest according to the Forbes List of February 2008: http://en.wikipedia.org/wiki/List_of_billionaires_%282008%29 )
My thinking has changed ever since. It’s no more a gamble or a science, but it’s an art that can be perfected!
It’s an amazing idea after all. Money working for you to get you more money is just too good to ignore. And all these without you having to even move your finger!! What is even more fascinating is that the money earned is capable of getting you more money. It is not magic but a concept called compounding put to good use (Well among all those geometry and Pythagoras we learnt in back in school at least there is something that’s relevant even now!!)
An investment of 10000 units of money may give a return of 600 units by year end (assuming a 6% interest). If the earned 600 units is left alone along with the original 10000 units then the earned 600 units is now also capable of earning more interest and the total investment by year end would generate a return of 630 units and the total sum becomes 11230 units. That’s the power of compounding for you!!
Now that we see how money can grow exponentially we come down to our original topic of investments and doing it correctly. That’s the correct point to bring Mr. Warren Buffet in again. Mr. Buffet had increased his personal savings in 1956 to $140,000 through judicious and carefully planned investments and he further increased it to $1,025,000 in 1962. Gosh a 600 % rise in 6 years. That’s what correct investments are capable of doing to your bank balance.
The point to be noted here is correct investments because as much exciting it may seem the money doesn’t come easy and if you are not careful you may even lose what you have. For it is not gambling where you might speculate and make a quick buck!!
With my own limited experience I can say with conviction that if there is an investment strategy in place and the investor meticulously does her ground work in choosing the right investments then there is ample scope for good money to be made. There are numerous types of investment opportunities available to suit the appetite of every type of investor and if the homework by the investor is adequate she will surely be rewarded accordingly.
Let me take the example of investing in stocks, considered a risky investment medium by many, a rash investment in an equity (stock) based on hearsay or a hot tip would always be destined to be nothing more than a gamble whereas an investment decision based on meticulous ground work into a company’s profile and its fundamentals would not only give the investor the insight to decide whether or not a stock is worth her money but also help her in taking a call about that stock in choppy weathers when the market is in ‘massacre’ mode.
So an investment is sound only when it is backed by a sound research into the fundamentals. If you don’t know what you are doing you are surely inviting a lot of trouble ahead.
But do all investors who perfect the art become Warren Buffet? Amm... Well I am not the right person to answer that question because I am just an amateur exploring this subject. But I think there is lot of foresight that matters in this business, which is behind all those success stories we all see, and not everyone has that.
A person who would have had the foresight to invest in the Microsoft IPO in 1986 would have seen her money grow by more than 50000 % in 2004.
Almost every body in this business is searching for the next Microsoft or a Google but surely it won’t be easy to recognize even if it is right there in front of us because “that eye” is not there with many of us.
One thing is certain though, in these times when financial planning for retirement is more and more becoming a personal obligation than of the government, sound investments have become a necessity to maintain that life style when the steady income stops coming.
Starting today, I would be posting some of my personal views on the importance of Investments and how things can change if you go about it in a systematic manner!
I must emphasize here that these views are based on my understanding of the topic shouldn't be considered complete or exhaustive on the subject. Hopefully they would prove to be useful to the reader !!!
It was a happy moment for me to be part of something I had admired for so long. It was "Ant-tak" or अंत तक in Hindi, a group of friends and family which knows how to enjoy life and has chosen music as the medium to do just that.
The official blog of this group called Anttak describes itself as "a group that just enjoys music singing and dancing just for fun. We organise the gathering at one of the homes of the participants, randomly, in turns. The music is usually accompanied by karaoke music and live instruments. This is purely for a closed group of families who just love music, to sing and listen."
My first experience of this cool group was a frolicking 12 hours of singing, dancing "Sakkat maja maaading". Boy o boy no body was a 50 year old there!!! This happened on 19th of april.
(I think the pics say it all)
It all started with the group meeting at Venkat n priya's place in a rather formal manner which gave me an impression that it would be another one of those "oldies parties" but boy was I proved wrong throughout the get together as I was the only one who remained seated throught (due to my illness). Everyone , even the 70 year old granny got up her feets to shake a leg or two and it was fun all throughout. Everybody seemed fully determined to have the time of their lives in those few years they were all together. And in between there were sweet melodies, oldies sung be elders and some poem recitals/songs sung by small kids, and by small i mean even a 3 year old kid.
But what blew me off was a full shloka recital by a kid named Akshay who did it with full josh and confidence( check out the pic).
Initially I had my apprehensions about this get together and wanted to give it a miss due to my illness but decided to go to cheer my sister Geetika who was supposed to sing one of my favourite songs ( Maa from the Movie "Tare ZAmeen Par").
But the whole concept instantly became a great hit with me as inspite of my illness I could feel the energy and enthusiasm of the people there.
I had a great time meeting such enthusiastic people and I am amazed to find myself desperately waiting for the next get together which is scheduled sometime in the middle of this may I am told.
Hopefully I would be able to enjoy and take part more actively the next time it happens.
Three cheers to अंत तक !!!