It is my firm belief that the key to building long term wealth is to never incur a large loss. The good news is that by following a few thumb-rules we can insulate our investments portfolio from any big jolt
A large loss sets you back by years’ worth of savings and earnings, and recovering from such a setback takes forever. Consider this – to recover from a 60% loss, one needs to get a 150% return (two and a half times) and an 80% loss requires that you should thereon multiply your money five times, to come back to the principal amount
Follow these thumb rules
- Say no to the temptation of Direct Stocks – If you are not a fund manager, having a team of research analysts covering all sectors of the Indian economy, who can create a diversified portfolio of closely tracked companies, then do not invest directly in shares. Invest through an Equity Mutual Fund
- Diversify – Invest in well-diversified, multicap equity mutual funds. Investing in sector funds or thematic funds is akin to investing directly in stocks
- Look at the long-term track record – across market cycles. Performance of the past few months or even a couple of years is no reflection of the capabilities of a fund manager. How well did he manage the big turns in the markets? How well did he contain the risks from a large loss? Was there ever a 60-80% fall in value to the portfolio?
While setting thumb rules are simple, following them is not easy. The emotions of greed and fear can often interfere with commonsensical thinking
At simplymutual, we make the simple, easy