InvestorQ : Can you tell me what is not investing and what are some of the basic rules I need to remember before embarking on investing in the stock markets?
Sam Eswaran made post

Can you tell me what is not investing and what are some of the basic rules I need to remember before embarking on investing in the stock markets?

swati Bakhda answered.
2 years ago

That is an interesting question but let us try and understand first as to what is not investing and let us also see why this is important to understand.

· Investing is not about putting money in your savings account, FD or even in a money market mutual fund. These are places to keep your money safe with liquidity. Investing is about growing your money steadily over a period of time.

· Investing is not gambling, so punting in the market is not investing. In gambling, you rely heavily on chance and odds. While there is an element of risk in investing, you are in a position to manage your risk. Investing is a conscious effort to growth your money steadily over a longer period of time. Don’t mistake it with gambling!

· Investing is not only about returns; it is also about risk. Remember, every act of investment is a risk-return trade-off. There are two questions you need to ask yourself. Is this the maximum return that I can possibly get for the given level of risk? What is the minimal risk I can take to get my target return on investment?

· Investing is not random, but it has to be backed by diligent research. Some of the world’s greatest investors like Warren Buffet, Ben Graham and Peter Lynch were deeply committed to research. Remember, the toss of a coin can favour you once or twice, it cannot favour you forever. Research is your best bet to buy good investments.

· Investing is not a timeless activity. Warren Buffet may have said that “My time frame for investment is forever”. But you obviously cannot invest that way. Don’t take a 1-year perspective to investing in equities. Keep a minimum time horizon of 3 years and on the higher side you can set according to your financial needs.

Having understood what is not investing, let us now focus on what you should know as an investor before you embark on investing journey. There are 5 basic rules that you need to necessarily know before embarking on your investing journey.

· All investment entails some level of risk. There is nothing like a free lunch and there is nothing like a risk-free investment. Some risks are obvious, some are not: some risks are unique to you investment and some are macro. But risks do exist all the time.

· All investment needs to begin with a goal. You need to define how much corpus you require at different stages and plan your investments and your risk allocation accordingly. Of course, you need to be practical. Do not begin with the assumption that you are going to earn 40% annual returns consistently in equities.

· Discipline is more important than skill when it comes to investing. You need to keep yourself well informed, read up on what is happening and what are the implications. But the key to generating long term wealth is more of discipline and diligence than some unique stock picking skill.

· Starting early is a major advantage and the sooner you start creating your corpus, the better. Because, the earlier you start, the more you earn returns and therefore the more your returns earn returns.

· Never put all your eggs in one basket. In other words, diversify your investments. If all your money is invested in 2 or 3 large IT stocks and if Donald Trump changes the rules of the IT game, then you are endangering your long term goals? It always pays to diversify your investments to reduce your overall risk. You may not get as much return as you may have got by concentrating your investments but then the risk will be substantially lower.