Wednesday, 30 December 2015

10 Principles to an Intelligent Investment Strategy

Making a smart investment is not a rocket science. It requires you to learn and follow the appropriate principles, with discipline.

An unfortunate thing about investment strategy is that most of what is taught is hazardous, as being only a half-truth. This abstract information could even prove to be expensive, many a times.

Let us now present before you the ten principles that have proven to help an investor advance higher up
achieving investment success.

1. Follow the ‘Expectancy principle’:

a. This applies relying on a systematic and analytical investment plan. Any other strategy will not
give you the confidence to eventually profit. Investment is not like gambling. A good investor should rely on a calculated expectancy, in order to certainly profit from his strategy.

b. It is important to be clear about whether you are investing for fun, or for profit. ‘Growing wealth’ is a science that is based on the fundamental principles of mathematical expectation. Therefore, you either invest scientifically with all the odds known, or you gamble with your financial future.

2. Don’t fall prey to delusions:

Never be influenced by financial forecasts, from the media or your investment prophet, while building your investment strategy. Forecasting can be explained as unknowable information. Any investment plan on the basis of future foretelling is essentially flawed, as it does not have any mathematical expectancy.

3. Invest in what you understand:

One of the best ways for expanding your investment knowledge is via due diligence process. Never neglect this and hurry into any strategy, due to timelines, anyone’s suggestion or just to put your money to use. This is about learning what one needs to know for making informed decisions.

Firstly, we should determine the mathematical expectation for your investment plan. This will help you consider only those investments that increase your portfolio’s expectations. Secondly, find out the correlation of your strategy. Doing this will help you build a portfolio to minimize the overall risks. Lastly, understand the risk management strategies, applying to your investment. This will help you accurately access your risk-to-reward ratio as well as get to know about how your capital is protected from permanent losses.

4. Compound Returns:

Compound growth is a measure of how any average person can attain extraordinary wealth. To work this out requires these actions: early investing, trust only known investment strategies that have a positive mathematical expectancy, reinvest on all profits, and add your earned income to your investment principal, to accelerate your compound growth.

5. Diversification:

The purpose behind diversification is lowering your portfolio’s risk profile. This can be done by adding the inversely correlated or non-correlated investment strategies. The idea behind this is to never add more of the same risk profile to any of the investment portfolio. Eventually the result is higher and consistent profits and lower portfolio risks.

6. Watchful Investment:

What does an investment strategy aim for? First is its “return of” capital, and only after that comes the “return on” capital. Profitable Investment is all about controlling permanent capital loss, via risk management disciplines.

How do you examine an investment strategy? Check if it has safeguards for managing risk exposure and controlling losses to such a level acceptable, under both normal and worse conditions.

7. Invest Offensively:

How do you balance your defensive investing strategies? While investing defensively, you must invest offensively. Each is incomplete without the other. While one manages risks and control losses, the other is for pursuing gains. Simply stating, offensive and defensive investment strategies are two sides of the same coin.

Instead of being too conservative or too aggressive, it is better to be moderate.

8. Liquidity:

This refers to the ease with which an investment can be sold to convert to cash. Examples of liquid investment include bonds and large-cap stocks. Losing liquidity is equivalent to losing flexibility.

Illiquidity eliminates the possibility of controlling risks and places extra premium on all other risk management tools.

9. Respect, but not obsess about, expenses:

Do your expenses add value in excess of your costs? Striking a balance between the two is the key.

Therefore, one should neither be a miser or a wasteful. Rather, be smart by paying gladly for services that add value to your investment.

10. Improve your financial intelligence:

Benjamin Franklin has said, “An investment in knowledge pays the best interest”. Ever thought what is the best investment one can make and why? The answer is investing in yourself, the reason being no one can take it from you and most importantly, it will pay you dividends throughout your life.

These 10 investment strategies will help you make your financial dreams come true, whether it is building wealth from zero, or managing the already accumulated wealth better.

The author is Ramalingam.K an MBA (Finance) and certified financial planner. 

He Can be reached at and

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