Steps for DIY Investors to manage their investments

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In the last few years of our practice, we have experienced two changes that I feel are here to stay, and further accelerate.

First, the average investor is getting younger. As more and more Gen Ys and millennials graduate into jobs and upgrade into higher paying ones, they are beginning to appreciate the need to invest earlier than we used to.

Second, over the last 10-15 years, the investing process has moved from being fully a paper-based process to now fully digital. This has meant easier access through explosion in investing options for individual investors.

These two factors, combined with the new-age confidence that today’s younger generation has, due to the manyfold levels of exposure that today’s connected world provides, has led to more and more investors seeking to invest on their own. Or as it is known popularly, DIY (Do-it-yourself).

The above is confirmed by both, the huge increase in demat accounts as well the increased levels of retail participation in the markets, over the last couple of years. This clearly indicates that more people are taking to investing in the market, and considering that these are all digital avenues, it‘s likely that the average profile is younger, more confident and prefers DIY.

This is good news, since this means that a greater number of people are partaking in the wealth-creation process of the markets and today’s younger generation are taking charge of their financial futures. That said, investing in markets is fraught with risks, and understanding those risks and preparing for them is a critical pre-requisite for both creating and protecting wealth.

Hence having a laid-own process with key steps to follow will help DIY investors have a guide-map to reach their objectives as well as guard-rails to ensure that they don’t fall off in the interim. The below steps should help DIY investors formulate a strategy process to invest and build wealth in the markets successfully.

Step 1 – Identify your investment area and build knowledge

• While there is no shortage of confidence, especially when markets are rising, it is not backed up by having adequate knowledge of what is being invested in. Most people rely on tips from friends/relatives/colleagues or Twitter when they invest

• Unfortunately, there are no shortcuts to this, and building a robust knowledge base which will in turn help you build good investment hypotheses is essential

• This is not too difficult, and there are enough (both free and paid) good quality resources in the form of blogs, YouTube channels and e-books, that should help you build your knowledge base

Step 2 – Outline your investment objectives and time horizons

• Many a times, people do things because others do it. Ie. herd mentality. But your circumstances are unique and hence you need to be clear why you are investing

• Even the best race car needs a destination and similarly, make sure you have a clear investment goal or objective before you invest

• Similarly, it is important to have a time horizon for every investment as this will act as a barrier towards impulsive decisions – both purchase and sale

• Note though, time horizons here are usually in many (or at least some) years. Trading may be a profitable pursuit for some but it is not investing, it is a form of speculation

Step 3 – Understand the risks involved and align it to your risk profile

• Every investment has risks associated with it and hence before you invest your hard-earned money, please understand the specific risks associated with it

• Risk can be understood as many things – for some it is permanent capital loss, for many it is short term volatility and for a few it is not achieving the said investment objective or goal – what is it for you?

• Again, what is your risk profile? This consists of 2 aspects – your (financial) capacity to take risks (ie. what does permanent loss of capital mean to your overall financial position) and your appetite for risks (your tolerance to downside volatility as well as capital loss)

• A combination of your risk profile and your time horizon will help you choose an investment that is suitable for your goal.

Step 4 – Have a review process & fix a monitoring periodicity

• Document your investment objective and time horizon and your reason for choosing a particular investment post analysis – i.e. your investment hypothesis.

• Put in place a review process – has the objective or its time horizon changed? Has the investment hypothesis changed? Has it changed enough for you to review the need to stay invested?

• Put in place a monitoring periodicity – this will help you resist looking at your portfolio often and succumbing to impulsive actions. A frequency of 6 months or even 12 months is good enough, since investment hypotheses are unlikely to change frequently

Step 5 – Set right and realistic expectations

• Last but not the least, along with understanding risk profile and documented investment hypothesis, setting the right expectations forms the third foundational pillar of a good investment strategy

• On one hand, it is important to beat inflation to create real wealth, and on the other hand, expecting too much too soon can lead to incorrect decisions

• Diversify adequately and look at the overall returns at a portfolio level, since however good you are, there will be some duds

• Lastly, appreciate the role of luck in your results and don’t make the mistake of attributing all your successes to your intelligence and all your failures to the market

The above steps will be useful for investors who wish to invest in both stocks and mutual funds, while the decision of which to go with is also an outcome of Step 3 above (if you do not want to take the risk of stocks, then use these steps but stick to high quality mutual funds).

(The author is NISM-certified investments practitioner and co-founder of Finwise Personal Finance Solutions. Views expressed are personal)