Simple tenets of successful investing

INVESTING

As in life, success in the investment world depends on the decisions one makes and their outcome.

However, as markets go through their cycles and as we go ahead in life, we often tend to overlook the basics, getting carried away by the moment - be it on account of a windfall gain, a hot investment tip or sharp movements in the markets, ending up making a bad decision.

Here are a few fundamental tenets that can determine our financial success:

It's the time that you give your investment that matters. Not timing.
So very often, we say to ourselves - I should have invested at that time, or I should have sold out when the market was at its peak. The fact of the matter however is that you only get to know the best or worst times, only in hindsight.

For instance, when the BSE Sensex was at 3300 levels a couple of years back, investors who thought markets had bottomed out, were surprised to see it go down further by 700 points in September 2001.

And then, in August 2003, when the markets had rallied from 3300 to over 4000 points, investors who stayed away thinking that markets moved up too sharply, missed another 500 points of the rally.

The moot point is trying to successfully time the markets is next to impossible. Your investment decision should be based on the careful analysis of your situation rather than market conditions.

It is important to remember that any short-term volatility you might face tends to smoothen out over the long term.

Diversify: Because winners rotate
The importance of diversification cannot be overstated "" it is a fundamental, long-standing investment principle.

It helps reduce portfolio risk because different investments rise and fall independent of each other. One cannot eliminate risk, but diversification across asset classes, currencies and sectors can help in limiting the exposure to event and systemic risks.

The combinations of these assets more often than not cancel out each other's fluctuation, thereby reducing the overall portfolio risk. This is applicable to investments within an asset class as well.

For example, among equities, one can invest in large cap or mid cap stocks or invest in a single sector, and among fixed income instruments, there are choices of corporate/PSU bonds, government securities, floating rate instruments.

Take a balanced approach
Investment experts recommend the asset allocation method for investment success. This entails ascertaining the ratio between different asset classes that is suitable for achieving one's investment goals and is in line with risk profile.

In other words, the purpose of asset allocation is to arrive at an optimal mix of investments that has the potential to produce the return one wants, within acceptable levels of fluctuation in the overall investment portfolio.

The thumb rule for asset allocation is to have the equity allocation at 100 minus current age.

Yet, most investors would today have a skewed asset allocation, with a much higher weightage to fixed income assets than required, due to their previous experiences in the stock markets.

(The author of the article is the CIO (equity) of Franklin Templeton MF. These are his personal view)