10 commandments of successful investing

Let me unveil the 10 commandments of successful investing today. These commandments strictly followed can make you a successful investor; make you richer. The successful legendary investors like Benjamin Graham, Warren Buffet have followed these principles, so why not you?

1. Decide your investment strategy and stick to it

An investor may invest in systematic investment plan (SIP) and when the market continues to fall he will discontinue his SIP. But market crash is the right time to continue your SIP. Because, during the market crash you will get more number of units and the averaging works out in your favour.

Another investor may decide 50:50 as his debt to equity asset allocation ratio. When the market goes up he may want to invest more in equity and hence he may change his asset allocation to 30:70. Actually when the market goes up one need to reduce his equity exposure to bring the portfolio back to his predetermined asset allocation ratio.

Do not change your strategies midway. You know what is best for you and this applies to deciding with foresight the ideal investment strategy for you. Once the strategy is set, do not fluctuate in your decision each time you decide to invest. This would only mean losses instead of profits.

2. Conduct your own research on stocks

It is not advisable to just depend on hearsay and decisions of your neighbour, friend, relative or tips from the media or your stock broker and invest in stocks. It may seem easy but could amount to gamble. Being an informed investor investing your hard-earned money needs you to ensure if the investment would meet your financial goal. This could be done through research from various sources.

3. Learn to overlook short term fluctuations

If you want to be a successful investor, you need to understand that it is futile to be affected by short-term fluctuations of the stock market. Investing in good and reputed portfolio ensures good quality of your investment and capital appreciation in the long run. The short-term volatility of the share market has got nothing to do with the long term performance of your investments and achieving your financial goals.

4. Resist investing in penny stock

Some investors have a common misconception that it is better to invest in penny stock than in high value stocks. This is wrong as whether you buy stock at Rs.5. You need to see the background of the company before looking at the price of the share.

5. Discard the losers and pamper the winners

There is a tendency among investors to sell off appreciated stock and to hold on to depreciated stock in the hope that it would rise. It is wrong, as it is possible that the shares which are not doing well may continue to underperform and the shares that are doing well may continue to perform in the future.

It is better to acknowledge you went wrong, swallow your pride and discard the loser stocks and lessen your losses. Your decision lies in deciding to suffer a one-time loss for future long-term gains.

6. Look before you leap

Even good company shares bought at the wrong price can be a poor investment choice. So devise some strategies like SIP, asset allocation to avoid this mistake.

7. Adopt an open-minded investment strategy

It may be advisable to consider investing in good companies; however it is wrong to overlook the point that small start-up companies would make losses. Even such companies with good strategies and growth plans could contribute to long-term capital appreciation. Always have an open mind in taking your investment decisions.

8. Base your investment strategy on the future

Investment decisions based on past happenings may not always be right. It is better to consider the happenings, but give more importance to the present and future prospects of the investment. An informed decision based on the fundamentals and mission of the company helps in long-term wealth creation.

9. Consider tax friendly investments

Making investment decisions based on tax considerations may prove counter-productive. However, minimizing taxes and maximizing returns after taxation would help. The long term capital gain tax is nil. So if you invest for a time horizon of more than one year you will have better post tax return.

10. Adopt a long-term perspective

Adopting a long term prospective is advisable if you want to be a successful investor. If you want to get short term results, then you will be able to cultivate only coriander leaves. If you want to grow a large banyan tree then you need to wait for years. So if you really want to be richer and create wealth, you need to be a long term investor.

You could have seen a lot of success stories of people, who bought a good stock 10 or 15 years back and accumulated a good amount of wealth now because of the appreciation of those stock prices. But have you ever heard of a person accumulating wealth by trading in the stock market or moving in and moving out of the market?

By trading in market you may make profits in a few transactions, but you will not be able to make profits forever. There is a lot of difference between making profit in a single transaction and being a successful investor forever.

There is a huge difference between knowing what we should do and actually doing it. The knowledge piece appears quite sexy; being interested, learning something new, coming up with that cool idea. The doing part sounds comparatively like routine work, no matter how easy this work may be to do or how obvious that it should be done.

Don't fall into that "knowing vs doing gap". Now you know the 10 commandments to successful investing and put it into practice to become richer.

(This article is contributed by Ankur Kapur, CFA (USA), Director Finqa. Finqa is a fee based advisory company offering personalized financial plans to individuals).