Successful investors don’t get rich simply by investing in any random stocks or funds. They all have a well-developed investment strategy, devised through years of experience and knowledge. And, the best part, most of the time it works perfectly for them.
From Warren Buffet to the famous Indian billionaire investor, Rakesh Jhunjhunwala, all follow their investment strategy to its core, which helps them to succeed in this arena.
Like any other job that requires a disciplined process, Investing is also the same, which requires you to be patient, calm yet mindful. I term, investing as both art and science because it requires knowledge, planning and right execution until you net the profit as planned.
This blog will focus on how to develop Investment Strategy to achieve better returns than the traditional investment sources like PPF, NSC, RD etc.
Setting up of Investment Goal
The first rule of any investment is to always have a clearly defined investment objective. Having an investment objective helps to provide a purpose and roadmap for your investments.
The most common goals people link with their investments are children’s education or marriage, retirement, buying a dream house after 10-15 years etc. The investment goals should be realistic and achievable in current standards.
When investing for a very long period, say 10-20 years, always break down your goal, else there would be a higher chance of deviation from actual investment objective.
Roadmap to Investment
Planning an investment is the most important step, as you decide how you’re are going to achieve the investment goal. The investor needs to select the right investment instrument according to their risk profile. For example, investing through mutual funds, ETFs, gold or directly investing in markets.
Investors who have long duration investment period should break down their investment period and investment accordingly.
For example, if the investment duration is of 20 years, divide it into four periods of five years each. In the first two periods, invest in best-performing equity fund (large or mid-cap funds) which has a higher return to risk ratio. In the next period, invest the sum to a less risky fund like a balanced fund to limit exposure of volatility to your investment. And, in the final term, park the sum in debt fund, to completely eliminate volatility and you can generate a risk-free return, which is usually higher than traditional investment plans.
Investments should be reviewed at a regular interval of time because it helps the investor to know its performance. Always compare the performance of the fund, you are invested with market performance and peer fund’s performance.
If the particular fund or stock in the portfolio has a weak outlook or not performing well for a period of time, consider moving to other stock/funds with a bright outlook. First it helps in minimizing losses, and second, it prevents from getting derailed from the investment objective.
Having a sound Investment Strategy always works for an investor to get optimal returns without much trouble. Also, the need of every investor is different and never can be the same, so while formulating, always factor in all the risks and keep realistic goals. And, never try to blindly copy the investment strategy of other investors.