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Market intelligence for non-intelligent investors – 10 basic rules of investing

Published : March 14, 2018

Market intelligence for non-intelligent investors - 10 basic rules of investing

Market intelligence for non-intelligent investors is the topic which I was considering to address since long. This is not because I am the most competent person to discuss the subject matter. But because when I talk even to someone with the domain knowledge, they also have lots of confusion when it comes to basics of investing. When it comes to investments, even the most un-knowledgeable becomes the matter experts. However, we should not forget that investing is an art as well as science. And needs to know various investment products along with human needs in the different situation. Unlike food, water, and air, we need a proper stream of money lifelong, in order to survive. And hence, we can’t take investments casually. 

Market intelligence may relate to stock market intelligence, financial market intelligence or equity market intelligence. Now the question is what is market intelligence. Before understanding the concept of market intelligence, let us understand the meaning of intelligence. The famous scientist Stephen Hawking sayings best suits our purpose of understanding intelligence. And in this contest market intelligence are instrumental in making us capable to adopt the optimal perspective of investments suited to our need.

Meaning of market intelligence

In the context of investments, market intelligence means information relevant to various financial products. We need to gather and analyze pieces of information specifically for the purpose of accurate and confident decision-making. Decision making to determine strategy in areas such as investment opportunity, choosing right investment instruments, and timing such investments. Here timing means when to buy or sell any investment products

10 basic rules of investing which everyone should know

  1. Decide your financial goal – what are your long term and short term goal
  2. Analyse risk factors – How much risk you can take, no risk, high risk, low risk or medium risk
  3. Decide on expected returns – Analyze that whether you want a fixed return or variable return based on your risk horizon
  4. Compare risk vs returns – Higher risk higher return, analyze your risk appetite before selecting an asset for your portfolio
  5. Duration of investment. You want to invest in a short period or long period and what would be your financial needs of future
  6. What are the various asset class available to you – Analyse various category of the asset class with their characteristics
  7. Do allocation in the right asset class – include right proportion of debt and equity in your portfolio
  8. Is it right time to invest. Know the market trend. Know about the uptrend, downtrend and sideways trend in the market before jumping in the market
  9. Do you need to diversify your investment – Diversify your funds to enjoy some safety and add variety to your portfolio
  10. Make yourself financially literate – know where your money is going and what return you will get out of it

I am elaborating each of these basic rules in details for greater understanding. The process of investment differs depending upon the needs of individuals. Investment for short-term might differ from a mid or long term. Similarly, the investment instruments for a risk-averse investor will be quite different from that of a risk lover. Quantum of investment and the choice of instruments also depends on the age of an investor. Despite such differences, basic rules of investing remain more or less same for everyone. Now let us understand these basic rules of investing. 

Market intelligence for non-intelligent investors - INTELLIGENCE IS THE ABILITY TO ADAPT TO CHANGE

Rule # 01 – Decide your financial goal

You can call a financial goal as a financial target as well and is based on money. You can make a short-term financial goal or a long-term goal. Or even a mid-term financial goal is possible. If you maintain a financial goal, it will help ease your future’s needs for money. Some good example of a financial goal is as follows –

  • Maintain an emergency family fund
  • Become debt free
  • Plan for early retirement
  • Create multiple income streams
  • Start insurances to cover contingencies
  • Make a plan to do what you love

Now the question is from where to start and set your own financial goal. I am enlisting the following steps that will help you set goal one for yourself.

Basic steps involved in a financial goal planning

  • First of all, determine what you value most. Whether it is leisure, lavish living or anything else.
  • Next, organize your financial documents and take out your time to manage your money.
  • After that gain control over your financial situation. Keep track of where all your money goes.
  • Smatter spending decisions help you to find more money without making more. This also helps to plug spending leaks and free up cash.
  • As a general thumb rule, you should maintain a debt of less than 20% of your net income. You must plan either to reduce your debt or completely make yourself debt free.
  • Individual financial credibility is must nowadays. So you need to keep a strong credit report. A credit report is a record of how you had paid your debts. This helps get a quick and favorable loan, better rate of insurance and etc.
  • Saving is essential for financial well-being and security of future. So before even start spending, you must make a habit of keeping some portion of your income aside. This will help secure your unforeseen future.
  • Setting up your financial goal comes next.  You might have a plan for a vacation, or going back to college for higher studies or of marriage. All these needs money. So you need to plan ahead and arrange money for the same on time which requires goal setting and planning.
  • Besides making a financial goal, you also need to plan for your spending. Occasionally you may spend unplanned. However, sticking to some basic plan of spending will help you make your financial goal achievable.
  • After making the financial goal, spending plan and initiation of saving, you need instruments to put your savings. You must evaluate the available financial instruments and match it up with your goal before actual investment.

Rule # 02 – Analyze risk factor

Next to the setting up of your financial goal comes assaying risk factors. With every kind of investments, some risk is associated. And every individual has his or her own risk appetite. Risk appetite means risk taking capacity. So it is always good to analyze the available set of instruments for investments on the basis of risk. Stocks are riskiest instruments among other alternatives. Other alternatives are mutual funds, bank deposits, bonds, post office savings, ETFs, and others.

Further, risk also depends upon the duration of investments. Short-term instruments may be less risky than its mid or long-term counterpart. However, the returns from those instruments might also carry lower interest as compared to long-term instruments. So it’s always better to make a list of instruments based on risk, for each and every financial goal.  

Rule # 03 – Decide on expected return 

Every financial instrument gives some sort of return. Returns may be high, maybe low and in some case, it may be negative. Returns are time-dependent. So, it is always advisable to assay what you expect from investing and then select the instrument. You will always get a chance to a trade-off between risk associated and your expected return from an instrument.

Investing directly in the equity gives you more returns in a bull run, then investing in equity-linked mutual funds. However, equity investment carries much more risk than investment in any mutual funds schemes. Likewise, a fixed deposit gives safe but low returns as compared to corporate deposits. If you are investing for a shorter period, say post office fixed deposits, your returns will be low when compared to higher period returns.

So, decide upon how much return you expect by putting your money locked in for a given time frame. Then compare the instruments based on the risk before finalizing for investments.

Rule # 04 – Compare risk vs return

In the investment risk is the chance that your actual return from an investment differs from your expected return. Thus, risk refers to the possibility of losing some, or even all, of your investments. In general, if there are low levels of uncertainty then the potential of return is also low. This principle is known as risk-return trade-off. Hence, return will rises with an increase in risk.

You must understand that low levels of risk always result in low returns. Whereas high levels risk will result in higher returns. Now is there any way to increase return while keeping risk to a lower extent? Yes, it is doable. It is doable by spreading investments into the variety of asset classes. This is known as diversification of the portfolio. Diversification is a portfolio strategy that combines a variety of assets. This reduces the overall risk of the whole bucket of investments in a portfolio. A diversified portfolio includes stocks, bond, mutual funds, fixed deposits, cash and etc.

Rule # 05  Decide the duration of your investments

Duration measures the sensitivity of the price of a financial instrument. It becomes more important in case of fixed income instruments. Some of the examples of fixed income securities are, bonds, banks and post office fixed deposits, corporate deposits, etc. For investment purpose, the duration is expressed as the number of years.

Now, for an investor the concept of duration become important. While constructing a portfolio, the knowledge of duration will help you to compare fixed income instruments. Suppose you want to invest in bonds. Then with the knowledge of the period of holding a bond with a variety of coupon rates and maturity dates will help you select a right one for your portfolio. If interest rates are expected to rise then you can go for short duration bonds and vice versa.

Let us suppose an investor wishes to buy a 20-year bond that yields 6% for INR 10,000. Or a 10-year bond that yields 3% for INR 10,000. If he holds the 20-year bond to maturity, he will receive INR 600 each year. And will receive INR 10,000 after 15 years. But, if he chooses 10-year bond until maturity, he will receive INR 300 per year. Also, he will receive the principal after 10 years.

Now suppose that he expects a rise in the interest rate by 1%. Then, in this case, he will go for the 10-year bond. This is so because he will only lose 7%, or (-10% + 3%). While in case of 20-year bond he will lose 14%, or (-20% + 6%). Conversely, when the interest rate falls then the 15-year bond will rise more than the 10-year bond. Thus, knowing the duration of investment will help decide for how long he/she need to remain invested in a particular instrument.

Rule # 06 – Analyze the various investment options

To an investor residing in India, very little options are available for investments. Some of the common investment options are –

  • Investments in bank and post office fixed deposits (FD) schemes
  • An investment in insurance policies
  • Investments in the national saving certificate (NSC)
  • The investments in a public provident fund (PPF)
  • Investments in the stock market
  • An investment in mutual funds
  • Investments in the gold deposit scheme
  • The investments in real estate

Few of hybrid investment options are open now like Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InvITs). But the scope is limited as of now due to low volume. One thing being an investor you should remember. That every instrument comes with its own risk and rewards. So you have an option to combine instruments in accordance to your need.

Rule # 07 – Allocate yours funds in the right asset class

There is six main type of financial products. These products are also known as an asset class. They are:

  1. Fixed income assets
  2. Commodities
  3. Real Estate
  4. Cash
  5. Equity
  6. Mutual funds

Each kind of asset class has his own merits and demerits of holdings. However, diversification helps overcome limitations of one asset class over other. Your money in savings accounts at banks and post office are equivalent to cash in hand.

A risk-averse person may choose a combination of the asset class for his portfolio. He had the option to invest in fixed income assets like post office savings, NSC. In commodities like in gold, and silver. Some debt instruments like in debt-focused mutual funds. And of course in cash. Likewise, those who are willing to take some risk can go for equity and equity-focused mutual funds. Other options for them includes real estate and real estate and infrastructure investment trusts. To cushion their high-risk investments they can diversify into bullion and fixed income assets.

There is always an option and a choice to make. If you are sincere about the financial security of your future, you have an option to do so. Even if you wish to earn from your savings you can do it, keeping risk at the lowest levels. You always have an option to leverage your risk capacity with interest income and vice versa.

Rule # 08 – Is it right time to invest?

Everything on this earth moves in a cycle. Whether its earth or tide at sea or interest income on your investment. Timing is crucial for every cycle. And, so is for your investment. What goes up must come down and vice versa is a kind of law of nature. This applies to investments also.

When the stock market is booming, you will find bullion comparatively cheap. Interest on fixed deposits will be low. If interests are high, bonds are generally available cheap or may go cheap. To some extent, prices of diamond and real estate are an exception to this. More or less their price appreciates over time. So, knowing the time for higher prices or when it is going to come down is crucial to reduce some of your income risk from investments.  

Not only timing entry in any financial instrument is important. Before the start of your investment journey, you must also plan for exit. Each instrument has rules for exit or partial withdrawal. So depending upon your future stream of needs you must plan to match the timing of exit/withdrawal as well.

Rule # 09 – Do you need to diversify your investment?

Yes, diversifying bits of help grow your wealth and gives you peace of mind. Go for variety with quality and not quantity is always good in investment. You must learn the science and arts behind allocating your savings. No matter whether you are risk taker or risk averse. You must put your savings in diverse instruments. If you are risk averse put 20-30 percent of your savings in riskier instruments. If you are risk taker you can go up to 60 percent in riskier instruments.

Moreover, it is always better to diversify within investments categories. Always take a disciplined approach or either buy-and-hold or dollar-cost-averaging strategy while diversifying your investments.Systematic investment plan, the SIP is the best dollar-cost-averaging strategy you can adopt. Diversification of your investment will always help you reach your financial goal with ease.

Rule # 10 – Make yourself financial literate

One of the main objectives of investments is the growth of your wealth. Another important objective of investments is to save tax with some good returns on investments. TDS free investments fulfill the second objective in a better way. Also, there are many best investment options available to investors. Indian stocks market is the best place for risk lovers.

However, to be successful in investment you must understand investment types,  the basics of stock markets, stock market classifications, postal investments, market status and etc. All these require your time and devotion. In nutshell, you need to keep yourself updated on financial investments. You need to make yourself financial literate.

No matter whether you are a novice, a beginner or have some experience in the stock market, mutual funds investing you need to remain updated. And to remain updated you need financial market intelligence. The market intelligence section of Raghunandan Money will help you with stock market intelligence, market data intelligence or an equity market intelligence. It is an online market intelligence portal meant for both beginners and experienced. I will strongly recommend all to track news section of the market intelligence section regularly to keep yourself updated on nearly every aspect affecting your investment.


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