Ten Steps to Successful Investing

Here are ten steps that could aid successful Investing. I strongly recommend going over these steps before considering any investment.

"Give me six hours to chop down a tree and I will spend the first four sharpening the axe." It is disputed whether Abraham Lincoln actually said those words. Nevertheless, it is a great quote.

Too many investors are in a hurry to invest. They suddenly realise the time lost or the unsuitable products they hold and are desperate to invest in one that would give "better/good returns". Sorry to be a wet blanket, but there is no hurry to invest!

Sorry to be a wet blanket, but there is no hurry to invest! There is a lot more to be done beforehand.

Regular freefincal readers who value goal-based investing may find the following a bit too familiar. I n any case, please do consider sharing this post with the floating buttons on the right.

Step 1.Why am I investing?  Aka what is the goal? I have seen so many people declare that they want to invest but don't have a goal! I fail to see how that is possible unless they have oodles of wealth. Retirement is a goal by default and is the topmost in the priority list.

Step 2: When do I need the money?  The time remaining is the single most important factor that determines whether a particular instrument is suitable or not. So it helps to be precise about the duration.

Step 3: What is the target corpus? If I have a goal in the future, I can estimate what it costs today. Then with a reasonable inflation percentage calculate the target corpus during the year I need the money.

Step 4: Choose appropriate benchmarks. For goals that are at least 10 years away, inflation is the benchmark. A portfolio (not just one financial instrument) should be able to beat inflation for such long-term goals after tax. The amount we invest is also important to achieve the target corpus.

For intermediate-term goals (5-10 years away), the benchmark is difficult to choose! If we focus on inflation, we may end up taking too much risk. If we focus on capital protection then we may end up paying too much tax or end up short due to inflation! So it boils down to personal comfort here. Not easy for a beginner to plan these.

For short-term goals (less than 5 Y away), we can ignore inflation and stick with the comforts of fixed income instruments. Why? Read more: Equity investing: How to define ‘long-term’ and ‘short-term’

Step 5: What asset class do I need to achieve the target corpus, given the time that I have? Once the benchmarks are clear, the asset classes should be clear with some caveats:

  • Gold is a dud investment that offers risk more than stocks, but rewards like a fixed deposit (after tax).
  • Real estate requires 'know-how' and lot of starting capital.

So this leaves equity and fixed income (for many).

Pc credit: Danyal saeed
Picture credit: Danyal saeed

Step 6: What return can I expect from the asset classes chosen? This is a key step because it requires knowledge of how asset classes operate.

For example, it is reasonable to expect equity produces returns that are close to or even a bit lower than how the GDP has grown over 5,10,15 years (depending on the duration that we have in mind).

Fixed income returns depend on the overall health of the economy and this is hard to predict over the long-term. Post-tax 6-7% is a reasonable expectation for the next 5-10 years. Beyond that is hard to imagine.

In the case of volatile instruments like equity, past risk is also important. For me, past performance = past risk. Read more:

What Return Can I Expect From Equity Over the Long-term? Part 1

What Return Can I Expect From Equity Over the Long-term? Part 2

A return of 14% +/-4% is what the 'past' suggests. So I am happy with expecting 10% from equity (so do a group 50+ investors who met for a discussion meeting on Sunday last at Chennai!).

There are many who think, "equity mutual funds have given 17-18% returns in the past, and that is what I will expect in the future". oh dear!

Step 7: How much of each asset class should I choose? We have decided the asset classes to choose and how much return to expect from them (post-tax). The next step is to decide how to build a portfolio with this information.

Suppose we expect 10% (post-tax) from equity and 6% (post-tax) from fixed income, we can mix them up in different ways depending on the need.

For a 10+ year goal: 60%-70% can be in equity.

For a 5-10Y goal: Anywhere between 0%-40% equity depending on comfort level.

For a 0-5Y goal: 0%-20% equity.

Suppose we have a 10+Y goal and decide to have 70% equity. The asset allocation then is 70:30.

(70% equity x 10% return) +

(30% fixed income x 6% return)

This gives 8.8% or about 9% as the post-tax portfolio return. Notice now we have personalised benchmarks for the portfolio and each asset class.

Step 8: What kind of investor am I? Have I used volatile instruments like equity before? Or have I stuck to the comfort of fixed income?

Can I stomach 60% or 70% equity for a long-term goal even if my goal requires it?

Am I investing on my own volition understanding all risks or with borrowed condition?

Step 7 is the amount of volatility necessary for the portfolio.

Step 8 is the amount of volatility that can be tolerated.

Effective reconciliation between these two steps is key to investing success. Those who are not comfortable with large amounts of equity can start small and increase it over the years. This is what I did, and I can assure you that appetite for volatility can increase slowly. This is healthy in more ways than one.

Step 9: Decide investment categories. Now that  asset classes and their proportions are decided, we can consider the categories available in each asset class.

Should I choose just equity mutual funds or have some stocks too? Should I use fixed deposits or debt mutual funds?

This depends on comfort level, understanding of the product and associated taxation.

Then, what kind of stocks to buy or what kind of mutual funds categories to choose?

Many ways to do this. Would suggest to focus on a minimalist portfolio.

Related posts:

  • How to select mutual fund categories suitable for your financial goals?

Step 10: Which instrument should I choose? Finally!

Goal-->benchmark-->asset class--> portfolio --> Categories--> instrument.

Some related reading:

How to select an equity mutual fund in 30 minutes!

How to choose debt mutual funds with no credit risk and low volatility

Those are the 10 steps to follow before choose a financial instrument. Periodic review and management is necessary after investing has begun:

How to review a mutual fund portfolio

How to Review Your Mutual Fund SIPs

Simple Steps to De-risk Your Investment Portfolio

Basics of Personal Portfolio Management

How to Rebalance Your Investment Portfolio

If you have reached up to this point, thank you! Do let me know if I have left out anything.

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7 thoughts on “Ten Steps to Successful Investing

  1. Parsh

    Hi Pattu,

    Thanks for sharing the perennial wisdom on investing.

    Is there any tracker for assessment of each goal identified year on year basis after I know the amount required for the goal ( medium and long term)??

    I had seen investment needed columns in Detailed Cash Flow Chart in Integrated Financial Planner sheet but was wondering if there is any tracker made with visual representation of each goal ( expected as per return and actual as it is).


  2. Austin

    >>>Gold is a dud investment that offers risk more than stocks, but rewards like a fixed deposit >>> (after tax).

    Keep 10 % of your asset in Physical Gold and you will never have to regret when the paper/stock ponzi scheme collapses and we enter into a period of long term recession.

    1. freefincal

      "when the paper/stock ponzi scheme collapses" just for how long will that 10% last is another matter.

  3. Austin

    Buy Physical Gold as much as you can understand , 10 % is like the bare minimum recommended as part of over all asset beyond that you can even keep as high as 90 % in Physical Gold and I know some folks who do that but that's their risk appetite.

    To say Gold is Dud would be improper for an asset that has stood test of times for centuries long before Central Bank started printing paper out of thin air.

    Exter's Pyramid

    1. freefincal

      There is a difference bet buying physical gold and buying gold as an investment. There is nothing proper/improper. I have merely stated my opinion and you have stated yours

      1. Austin

        Yes I mean investment , Like I said Gold should be part of investment but then Thankfully Indians do buy & keep Gold as a matter of culture/marriage etc

  4. Siladitya

    law farm gives insight into legal implications and law related things that we also require in daily life and even in investing and investment related decision. Most of the legal information shared is of high quality, researched and free


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