Often investors crib about not obtaining a good return from their investments. As little fluctuations occur in the markets, investors start losing confidence about their investment and pull out money from the markets. Not only does an investor pull out his money, he further adds to the anxieties of other investors.
As the world is currently witnessing highly uncertain times due to the coronavirus pandemic, it becomes increasingly material for individual investors to watch the stocks closely and make investments like a pro.
No, an investment like a pro does not necessarily mean an investment with guaranteed returns but comprises of several strategies and guidelines that an investor considers while making a prudent investment. A sound investor makes several sacrifices, and his disciplined approach coupled with faith in his investment, is likely to result in a lucrative investment.
Related: 6 Tips When Investing in Bear Market
Let us look at some of the strategies and methods that could result in a sound investment for an investor.
Taking control of one’s emotions is the first and foremost characteristic of a prudent investor. Investors often regret about taking a decision due to weak emotional control. A rising market can lure the investor into increasing his investment or investing in more risky assets. This can result in losses for the investors with the smallest of fluctuations in the market due to the risky nature of the assets.
On the other hand, an investor may lose confidence and develop high anxieties due to the uncertainties in the market, like in the current situation where broader equity markets have been witnessing the impacts of COVID-19.
Greed is one of the most encountered emotions that results in losses for an investor. A disciplined approach to tackle emotional override is necessary for a sound investment.
Technical and Cost Assessment
An investor should be well-versed with the technical know-how of the investment process and types of investment options.
Often investors fail to ascertain the correct value of costs associated with the investment and fail to enjoy income even though the investment assets have been performing favourably. At times, the investor and his advisor also engage in some disagreement as the investor incurs lesser income, and the advisor charges higher fees.
Developing technical knowledge shall help the investor to avoid a certain type of discrepancies occurring in the process of making and managing the investment.
Keeping Track of Developments Influencing Investment
As per conventional wisdom, little or incomplete knowledge can prove to be a risky affair for anyone, especially an investor who risks his money for earnings. Keeping track of recent developments in the environment that are likely to impact the earnings can help the investor to stay a step ahead while making an investment decision.
For example, the current volatility in the market seen as an effect of the back to back growth reported in the coronavirus infected cases has become a highly moderating factor for the investor’s choice of investment. The risks posed by the mounting uncertainties in the financial markets can be mitigated by keeping track of major events that are likely to drive an unfavourable change in the market.
Ensuring Quality in Portfolio
An investor who keeps track of the major events influencing the mood of investors in the financial markets can maintain quality in his/her portfolio. Proper knowledge and experience can help an investor to build a quality portfolio.
Although there exists no exact definition of quality investment; however, it can be said that a quality portfolio is characterised by investment vehicles that are less risky and offer more returns with that amount of risk as compared to other investment vehicles.
Diversified investment is one way to ensure continuous returns and mitigating the risk amongst the investment assets. Investing all your hard-earned money in one asset class can expose the investor to higher risk. This can also be related to conventional wisdom which can be stated as:
“Do not put all your eggs in one basket.”
For example, if an investor puts all his money in equities and the market plunges sharply due to heavy selloff, the investor is likely to lose a significant portion of his investment. However, investment in less risky and safe investment options, like gold, can shield an investor against the high risk involved in equity investment.
Selecting the Proper Investment Vehicle
Several investment assets and vehicles are available in the market for an investor to choose from. A prudent investor ensures that the checklist comprising of several features of quality investment is fulfilled before he/she invests.
The strategy of developing ample knowledge, as mentioned above, can help an investor to select the most lucrative avenue of investment with minimum risk. Since similar investment options may show varied performance in different markets, region-specific, as well as market-specific knowledge, is also necessary for selecting a suitable investment asset.
Some of the investment options in New Zealand include:
- Bank Deposits (Cash): Low risk and low potential for return
- Bonds: Low-Medium potential risk and return depending on the credit rating of the bond
- Shares: High potential risk and return
- Property: High potential risk and return
- Funds: Low-High potential risk & return depending on the type of fund
- KiwiSaver: Low-High potential risk & return depending on the type of fund
The investment options are not limited to the vehicles mentioned above, and there exists a wide range of country-specific as well as international investment options in the market.
Now that you know how important it is to ensure risk mitigation, an investor is first required to make a clear assessment of the risk involved with the type of investment that the investor is likely to make. Not only this, but the ability of the existing investment to tolerate risk needs to be assessed by the investor.
Risk assessment is an imperative and one of the foremost elements of a sound investment strategy. There are several methods for risk assessment that an investor can implement to ensure investment in assets with minimum risk.
The current bearish situation in the financial markets across the globe is one of the most suitable time for investors to assess the ability and gravity of his/her portfolio to tolerate risk. The strategy of diversified investment is one way that an investor can distribute risk among his investment assets.