A Simple Technique for “Spending less and Saving More”

In the digital age, the current affairs reach our living room 24*7. The power of internet and social media makes the news and rumors spread like a wildfire. Because of this information overload we become so focused on details that we begin to ignore the overall situation. If we are unable to see the wood for the trees, then we need to take a step back from the situation, to regain a wider perspective.

Many investors change their long term investments based on the short term sensational current affairs. They switch from risky investments to safe investments the moment they hear this. They ‘Act first and Think later’. This is very dangerous as far as investment decisions are considered.

Thailand and Europe:

In fact today, the investor’s biggest worry is not Indian market ; but the problem in the Eurozone.

Thailand faced a major natural disaster in 2011. Severe flooding occurred during the monsoon season. The World Bank’s estimate for this disaster means it ranks as the world’s fourth costliest disaster as of 2011.

Investors focusing only on the short term crisis advocated for a long term bear phase in their equity market. But Thailand’s equity market rebounded in the Q1 of 2012.  This was possible because of the right kind of steps taken by the government such as simulative policy measures and reconstruction efforts. IMF now projects Thailand’s GDP to grow 5.5% in 2012 and 7.5% in 2013.

Similarly the European debt crisis has created a negative sensation among many investors. They started advocating for a long term bear phase in the European markets and other related markets. The fact is these markets have already factored this debt crisis. The possibility of further unexpected negative news seems to be very less.

In due course, this European crisis will settle down. The European leaders are determined to solve the fiscal deficit problem. They have enforced discipline on countries which have not fulfilled the obligations.

Of course the austerity recommendations will not happen in some countries.  This is because of the bureaucracy or the lack of will by the locals. But the leaders are determined and resolute and have taken the bold and prudent decisions so far and moving in the right direction. They have taken steps which are painful for many in the short run but it has got the potential to produce a more positive long term result for each and everyone.

Investor’s expectation:

Investors are looking for a kind of assurance. Though they all know it is impossible, they expect positive outcomes and favourable news every day.

Even today investors remember the market crash of 2008. Sensex has fallen down from 20873 to 8160. It is a loss of 61% from the peak. But how many of us recollect the much faster recovery of 2009 and 2010 in which sensex recovered from 8160 to 21004. It is a gain of 157%. Investors remember the sudden market crash irrespective of they have experienced a loss or not. But they don’t recollect the much faster recovery if they have not gained out of it.

We all know the fate of investors who moved out because of the bad news about the market at the end of 2008 and beginning of 2009. They all have missed the faster recovery of 157%.

So whenever we hear a sensational current affair, we need to take a step back and look at the big picture to understand the REAL problem. This would be the holistic approach towards your investment decisions.

Do the basics right:

So as to get better long term results as an investor you need to STOP reacting to Short term sensational current affairs. You should do the basics right. You need to invest your long term money in long term investments and your short term money in short term investments. Make an in-depth fundamental analysis on the investment scheme before investing.

Do periodic review and check if the scheme in which you have invested is not performing, because of the non-performance in the market or poor performance of the scheme itself. If the scheme itself is poor performing, then we need to cut our losses and move in to better performing scheme in the same asset class. If the market is underperforming, then we need not move out.

Timing Vs Asset allocation:

Timing is difficult and almost impossible. So instead of investing in a single asset class diversify across various asset classes by creating an asset allocation ratio based on the risk taking appetite and required rate of return. Then rebalance these assets periodically.

In spite of the short term sensational current affairs, these time tested investment strategies will  give you much better positive outcome to your long term investments.