Improve your financial future

The best way to improve your financial future is to design an investment plan to suit your individual circumstances and regularly monitor the same. The following ten lessons will help you stay on the right track and also achieve financial goals on your way. They will help you to improve your financial future.

1. Risk cant be avoided, so manage it

Once you decide to put your money to build long-term wealth, you have to decide, not whether to take risk, but what kind of risk you wish to take. Determining your risk involves measuring the impact of loss on your financial health and also on mental well being.

Money in a savings account is safe. But inflation will decrease its value, a risk that would almost ensure your failure to reach your goal of long-term wealth. On the other hand, investment in stock market may be risky over the short-term, but provides remarkable growth over the long term.

2. Start early

Never say that ‘‘I’m too young to start”. If you start saving and investing early, it will set a stage for you for a significant financial growth later in your life.

3. Don’t be greedy

Most people invest in stocks and expect them to double in quick time. If you want to double your money, either buy a lottery or go to a casino (but be prepared to lose everything). Stock market is not gambling.

The market is a reflection of economic growth and one needs to align one's expectation of returns in line with the expected GDP growth. Always develop realistic expectations. Expecting unreasonable returns will surely cause disappointment, leading to excessive risk-taking.

4. Invest regularly

The market is unpredictable. Timing the market is not possible. You may be lucky once or twice but history has not produced a single investor who has made money regularly by timing the market.

Don't panic when the market is dropping and don't become greedy when prices are rising. Emotions can be the greatest enemy to your long-term investment plan. History has shown that when most investors are selling, you may have been better off buying.

5. Stay invested

Stay invested for longer periods. It will keep you from making common mistakes such as timing the market, picking bad stocks, etc. The reason most people don't get rich with stocks is that they don't stay in long enough.

6. Don't churn your investments as it only increases costs

Don't buy stocks. Buy businesses and that too after due research. And since businesses generally don't change fortunes overnight, there is no need to get in and out frequently when some short term events play out in the market.

Too frequent trading cuts into the investment returns more than anything else. Remember that the only person who makes money in regular churning is your broker.

7. Build a diversified portfolio

Build a portfolio that is diversified among different types of investments. Different sectors of the market move at different times in different patterns, thus asset allocation is necessary in order to reduce the risk of huge losses and improves the chance of stable returns. However, remember not to over-diversify and own too many investment products.

8. Sell the losers and hold the winners

It’s seen that investors gain profit by selling the stocks that have appreciated, but continue to hold onto stocks that have declined, in hopes of a bounce back. This one single fact has been the reason why most investors don't get the true benefit of the markets.

It’s important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important that one should be honest and have a loss, else future losses may even be greater. In both cases, judge the companies on their merits according to your own research.

9. Stay away from the so called hot tips

Never rely on so called hot tips from someone, be it your friend, neighbor, broker, or anyone else. You will be lucky with these tips sometimes but it won’t make you an informed investor and that is what you need to be in the long run.

10. Taxes are important - But not that important

The primary goal of investing is long-term growth of your money through sound investment decisions. Tax implications are important, and you should always try to minimize taxes thereby maximizing your after-tax returns. But putting taxes above all else can often lead to poor decisions.

Keep the above rules in mind and your dreams will turn into reality.