Most people usually invest in real estate, gold, mutual funds, fixed deposits, or stock markets. All they end up making is a measly 8 to 12 percent per annum. Those who are exceptionally unfortunate get stuck in the middle of a crash and end up losing a lot of money. But what if there was another way?
In the book, Coffee Can Investing, Saurabh Mukherjea along with Pranab Uniyal and Rakshit Ranjan show us how to make low-risk investments that generate great returns.
Here are 10 tips from the book to help you invest better:
It is critical for an investor to nail down objectives and bake them into a financial plan. The exercise helps match the investor's financial goals with the kind of risk that needs to be taken in the portfolio.
It is important not to adhere to the age-old wisdom of investing heavily in fixed deposits, real estate and gold. These assets have unperformed equity by significant margins over long periods of time. In fact, these assets have often given returns lower than inflation over long periods of time and thus damaged investors' wealth.
Equity remains the most powerful driver of long-term sustainable returns. However, investors need to be patient and systematic with equity investments. They also need to keep their brokerage and financial intermediation fees low.
Fund expenses are often ignored but are deceptively important. Given their compounding over long periods, they have the ability to drag down investor returns drastically.
Unlike earlier years, the alpha (or outperformance) in large-cap equity mutual funds is now negligible. In this scenario, it makes much more sense to invest in passive funds or ETFs.
A broker suggesting funds to an investor leads to a conflict of interest. Driven by SEBI, the country has already moved to an 'only advisory' or 'only broking' model. Thus, an investor is better off paying a certain percentage as advisory and investing in the most inexpensive funds (as opposed to the traditional practice of using an intermediary who is renumerated by the fund manufacturers).
Patience premium in equity investing: Given the behavioural concept of 'Myopic loss aversion' defined by Shlomo Benartzi and Richard Thaler, investors who do not have even a year of patience, i.e. stock holding periods less than one year, are likely to believe that 'more often than not, people lose money in equity markets'.
Create a financial plan which helps you deliver on your life goals. Unless you do so, you will be shooting in the dark. A financial plan helps you quantify and rationalize your life goals. It also helps you set up a return expectation from your investment portfolio so that you can build an appropriate portfolio with just the right amount of required risk- no more, no less.
Understand the importance of high-quality investment and patience. There is inherent volatility in the equity markets. To exit at the first sign of volatility or trying to time the market will rob you of an opportunity to derive handsome long-term gains.
Intermediaries make equity investment a complicated affair: for the vast majority of equity investors in India, investment becomes a complicated affair not only because they are surrounded by substandard advisers, but also because they imbibe (or are fed) incorrect investment theories.