Summary
- Investing in the business which an investor understands helps to minimize the chances of big mistakes.
- An investor should always have a pre-defined goal, which would help define a roadmap for his investing goals.
- Diversification must not be ignored, and it may greatly help improve the portfolio's risk-adjusted returns.
Even for the best of the investors, the year 2020 had been a challenging one. However, those investors who have invested with the right skills and mindset would have beaten the market hands down. There are many ways to invest in the market, and it all varies from investor to investor.
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However, there are a few tips that may be applied by anyone to reap the maximum benefits from the markets. A few of these tips are:
- Invest in what you understand
One of the easiest ways to avoid big mistakes in the stock market is to invest in the businesses which an investor understands; in other words, avoiding investments that are too complex to understand. An investor should have a reasonable grasp over a few industries or business models that he understands well.
There are thousands of listed companies out there, and to pick the best performers one needs to have a thorough understanding of their business models. This may not guarantee a huge success but can reduce the chances of big mistakes.
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- Have pre-determined investment goals
The chances to achieve the financial goals become relatively easy when an investor knows what the goal is. Everyone has different goals planned for their future with a different time horizon. Based on these goals, one should prepare a well-established pathway to invest, which would help them take calculated risks with their investments.
For instance, if one desires a very ambitious goal of 40 – 50 per cent return per annum, he may want to dive deep into a small-cap and midcaps space. Someone with decent retirement goals having a long-term horizon may settle with 15 – 20 per cent return per annum investing in less risky blue chips.
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- Diversification
Diversification means investing in various uncorrelated assets/markets/sectors to spread the portfolio's risk. Having a highly concentrated portfolio may reap higher profit when those specific securities are on the move. However, high return also comes with high risk, and if that asset goes down in value, the entire portfolio will take a hit.
Therefore, while making a portfolio, an investor can diversify based on asset class like equities or commodities. Market capitalization can also be used to split investments based on the size of the companies. The most popular way of diversification is across sectors or industries like retail, banking, real-estate etc.
These are a few of the many tips that an investor may keep in mind while investing their hard-earned money in the markets.
