Headlines are designed to grab attention, not to guide your finances. A dramatic overnight story can make even seasoned investors doubt their plans. The purpose of following the Global Market should be to stay aware, not to react impulsively. Similarly, noting the opening trend in SGX Nifty is useful only when it fits into a broader framework. This article shows how to convert the daily stream of information into a calm, disciplined investment plan suited to Indian households.
Begin With Your Goals
An investment plan has to begin with a purpose. You have to lay out your financial goals and objectives, for eg, buying a house, funding your child’s education or retirement. You also need to assign a value and a time frame to each goal. A goal that is five years away will have a different strategy than one that is twenty-five years away.
Once you set your goals, evaluating headlines becomes easier. You will start asking “How does this impact my goal?” rather than “Should I be worried about this?” More often than not, you will find an answer to the former that puts your mind at rest.
Deciding Your Asset Allocation
Asset allocation, or the distribution between equity, debt, gold, etc is the most crucial decision that you will take. It defines your returns as well as the risk that you will have to live with.
A young earner with steady income could have 70-80% in equity while someone about to retire may want to limit it to thirty to forty per cent. There is no right or wrong allocation, only what suits you. Remember, no allocation is good unless it is one that you can stick to. An aggressive allocation that you change in the face of a crash is worse than a conservative one that you stick to.
Automating Good Behaviour
Automating your investments helps you build the habit. Diversify your systematic investments across your chosen funds. Automating your transfers to your emergency or insurance fund also builds discipline.
The best part about automation is that it takes away your ability to make bad decisions. On a day of mass panic, your investments are safe since you are not in control. In the long run, patience will turn out to be more profitable than any decision that you may take in anger. You can also raise the quantum of your SIP as and when your income permits.
Using Information Wisely
Set a limit to the information that you consume. Select two or three credible news sources and browse through them once every day instead of aimlessly roaming through multiple sites. Don’t get trapped by click bait headlines and unsubstantiated forwards. There is plenty of time to read, but if you have a pressing need to act on the news, give yourself a time out.
When a headline makes you anxious, put off taking any investment decision for twenty four hours. This allows you to do some research to separate facts from opinions and emotions. It is also a good idea to write out your anxieties and what you plan to do about them. Chances are you will find plenty of reasons to ignore the panic.
Reviewing and Rebalancing
Conduct a review of your investments at least once or twice a year. Check if your goals have changed, if your allocation needs tweaking and if your funds are still doing just fine compared to their competitors. If equity has risen beyond your allocation, book some profits and move it to the safer assets. If it has dropped below your allocation, top it up. This rebalancing acts as a discipline to sell your expensive winners and buy cheap losers without getting emotional.
Protecting the Plan
No matter how good the plan is, it can only fail if you fail to protect it. Buy adequate term insurance if there are people who depend on you and have a health cover for yourself and your family. An emergency fund that covers at least six months of expenses in an easily accessible account is also a must. Make sure all your nominees are up to date and that you have a simple will in case something happens to you.
The Discipline Dividend
Investing is not an exciting business. It is about setting goals, picking the right allocation, automating as much as possible and ignoring as much as possible. The best part about this discipline is that it creates a cushion of comfort and confidence that only grows with time. It is easy to get carried away by the drama of the markets. But the disciplined investor knows that the headlines are only for the anxious.