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Wednesday, February 02, 2011

My Investment Rules

Some simple rules I swear by:
  1. Keep it Simple Stupid – The more complicated you make it, the greater chances of messing up, the greater the chances of you feeling this is not working and giving up.
  2. A penny invested is a penny saved – What I’m getting at is if you invest something, it’s surely not being spent on something you didn’t need. You know what you want and you also know what you don’t need.
  3. I will not gamble – This means no hot tip (even if it comes from the very respectable and your favourite business guru – take the tip, do your own home-work, take responsibility)
  4. I will diversify (Within your limits of course – If you are not comfortable with investing in China, don’t do it). A good suggestion is around 10-20% in overseas markets
  5. I will only invest for the long term. This also means that you will have sufficient cash on hand for your short term needs (say at least a year). You should be thrilled when the market falls to new lows.
Simple investment techniques for the common investor:
  1. One or more MUTUAL FUND SIPs that invest out 10-20% of your monthly income (Bring some sector diversity in if you like or even some geographical diversity to reach your diversity goals).
  2. One or more Index funds again invested on a monthly basis without looking at the overall market size.
  3. Setup a rule for how much of your portfolio you would like invested at different levels of the market and do a monthly rebalancing to ensure that you are close to that level. e.g. At a Index level of 9000, I plan to put 80% of my assets in stocks – essentially moving cash into stocks to make this level and at 18000, I plan to have just 40% of my assets in stocks – essentially moving stocks into cash. You can pick these values once or twice a year depending on your understanding of the market’s best and worst possible levels. Don’t change this rule too often.
  4. Rebalance once in 2-3 months (again follow a rule and a reminder in your calendar to do so) to ensure you don’t end up tracking this every week or maybe even every day.
  5. Beware or Be-aware of the Tax-Man (even though he comes only once a year). This could effectively mean delaying the sale of a stock on which you are sitting on a profit for several months for a few more months so that ST gains turns to LT gains.
Coming Up … My Investments Dashboard – A simple excel that semi-automates my investments and satisfies my gambling instincts too?