There is nothing trivial when it comes to accumulating wealth and investing especially if the investors are confused between desired results and avoiding the risk factors. 11 simple yet effective habits can actually help the investors to accumulate the capital in a better and composed way.
Habit No. 1:
Make a binding commitment
There are three options that every investor can use to make binding commitment
- Strategic also known as long term characteristics should rule the part to various asset classes.
- The common rule that every investor should follow is to make sure he not putting all his eggs in same basket which means he need to diversify.
- Invest regularly
1. Put strategy before the tactics:
- It is important that one should put the strategy before the tactics which means invest in the strategy.
- Investors should decide on the basis of strategy if he wants to invest in equities or in bonds, depending on what suits his risk profile.
- Strategic asset allocation can be implemented easily with the balanced portfolios. If everything is managed actively, it is easy for portfolio managers to make the tactical adjustments that also without letting the investors to worry about anything at all.
Every investor must have come across the term "Never Put All Your Eggs inOne Basket". However, only few investors actually follow this term. Usually there is not a huge point get hold of perfect investment every time and to make continues changes in your portfolio. However, you should not put all your investment in one single bond, equity or asset.
3. Invest regularly:
When it comes to saving plans the rule is same i.e. to earn the risk premiums it is important to take risks, it can be in terms of market risk premium, equity risk premium or inflation risk premium. Though there is no guarantee of the specific performance, there are three effects that can be tactically combined.
- Diversification Effect: Making investment regularly in your portfolio will give you the chance to diversify in a basket of bonds or equities. The savings can go in different infinite multi asset solutions. Investment diversification strategyis the key to earning high returns from your capital and is preferred by successful investors.
- Average Cost Effect: When it comes to paying exact amount on regular basis in the saving plans basically means that the shares are basically bought for different amount as they continue to change with the changing trends in capital market.
- Compound Interest Effect: If you want to earn benefits from compound interest effect by reinvesting distributions than you should save for long period of time.
Habit No. 2:
KNOW WHAT YOU WANT AND CHALLENGE YOURSELF:
If you analyze the lessons that behavioral economics taught over the period of time, you will realize everything comes down to one thing i.e. the functionality of the brain is the result of development process that has been taking place since forever. This is the reason that our brain sometimes shows certain behavioral patterns that were part of historic period and are not easy to be explained rationally.
To break things down let's take some simple example: you as an investor often use a certain frame to view the world of investments. You see whatever you desire to see, keeping a close eye on the loss rather than looking at the better alternatives for better results.
You prefer to go with the flow by following the crowd around you or lean on certain sentiments that keep you torn between the greed and fear of loss.
Before making any decisions, put yourself in a test: if you are playing head or tails and you are at risk of losing 50 CHF every time on tails, before actually willing to start playing this game, how bad would you want the chance of the winning,definitely more than 50 CHF.
This desire more is neither wrong nor right as the only thing that it reflects is your preferences. If you prefer to leave whatever savings you have in a savings account and eliminate the factor of getting returns or simply back off from something just because you fear loss, this can be something very dangerous for an investor.
IF THE HORSE IS DEAD, DISMOUNT:
It is a great thing for you to pay attention to Dakota Indians and their wisdom. They believe in the terms that "If The Horse Is Dead, Dismount".There are still a lot of investors who back in time bought some equities for not more than 60 CHF and even today after decades they are still hoping that prices would return to same type of level.
However, if they had decided to sold those equities and switch to a huge variety of European or German Equities, they might have end up with good return on investment instead they preferred to hold on to their idea of gaining from their equities for a long time.
Habit No. 3:
THE FUNDAMENTAL LAW OF CAPITAL INVESTMENT:
A successful investor is well aware of the fact that he cannot simply enjoy the risk premiums if he continues to ignore risk. This is one of the fundamental laws when it comes to capital investment. In order to explain this concept logically lets use simpler terms.
In order to understand the importance of investments in the riskier assets, one should think about the high returns that will be generated from these investments. While on the other hand, the investment with low risks does not bring in high returns.
To understand the above factor, it is important to take a look at the history:
According to the historical time series that is available for equity market of US, indicated that the when it comes to the risk premiums, there is no disappointment, despite the fact that the return for US equity market has not been exactly same all this time
On comparing the risk premium that are on the American stock market to 30-year US Treasuries for over 30 years right from the beginning of given time period i.e. 1801 to almost end of the 2015, it can be seen that 3.7% pointer were generated from the risk premium for over 30 years.
If you look further you will see that the weakest performance period was from 1981 to 2011, has the risk premium of almost -0.85%. Upon analyzing the entire series you will see the effects of the equity premiums from 1901 to 2015.
If the investors had been wise and invested only $1 in the Treasuries back in 1801, they will have earned almost $1550 or even more at the end of the 2015, which means that if your ancestor had invested some capital at that time then you would have achieved 155000% returns on that invested capital.
Habit No. 4:
INVEST, DON'T SPECULATE!
There is no need to track prices movements as well as market in order to find out what is the perfect timing to go in or out. No one will call you and explain you when you should invest and when you shouldn't invest.
However, if you are serious about accumulating the capital for a longer period of time, you would stop speculating and start investing. When it comes to speculation, it is like betting on the price movements but in short terms. On the other hand, investing is all about putting the capital you have in some work that could get you benefits in the long run.
The chart given below shows distinction that is based on the different equity market segments. If you take the example of European equities, you will see that the diversified investments has been made for the 25 years, on average you have earned 8% returns on investment.
However, if you sit back and just wait for the better prices and wasted 20 best days then you have gained 2% or less. On missing 40 best days, the loss will be of 2-3%. It is better method to make your money do the work. Moreover, when it comes to missing some of the best days, it is extremely of high risk.