When you combine these two factors, it means that women must save more of their take-home salary than men. So for men if the rule of thumb is that they must save at least 30 per cent of their take-home salary, for women this figure should be 50 per cent.

Women [by and large, according to experienced financial planners] also tend to be conservative in their investment approach. However, if they are to meet their retirement savings goal, then they must eschew the conservative approach and invest a large portion of their retirement corpus in equities [which are known to give higher returns over the long term]. In view of their longer life span, even after retirement women should not shift their entire corpus to debt. Some portion of their corpus must remain in equities so that it is able to fight inflation over 25 years or more of their retired lives.

If you anticipate an investment horizon of seven years, you could invest in balanced funds that invest 65 – 80 per cent of their corpus in equities

Before you begin investing

Prior to any savings to meet your long-term financial goals, you must pay off all your high-cost debts, such as personal loans and credit card debts. Having paid off your debts, get into the habit of paying credit card bills at the end of each month, instead of paying interest on revolving credit.

Establish a contingency fund. This should equal 3 – 6 months of your living expenses, including child’s education fee and cost of insurance premium. This fund is meant to take care of temporary layoffs, prolonged illness or an accident that leads to temporary disability. Keep the contingency money in a savings account or a liquid fund [from a mutual fund house] where it is easily accessible. Next, let us discuss how you can go about meeting some of your most important financial goals:

Starting a family

Now suppose that from the day a woman starts working, she starts saving for the time when she will take a break from her job to start a family. She believes that she has an investment horizon of five years. A risk-averse individual should put her savings for this goal in fixed deposits while a non-conservative investor might consider putting her money in debt mutual funds.

A woman who anticipates that she has an investment horizon of seven years could invest in balanced funds that invest 65 – 80 per cent of their corpus in equities. It has been seen that the probability of negative returns from equity declines dramatically if the investment horizon is at least seven years.

Avoid branded children’s products either from insurance companies or mutual funds

Investing for child’s education

Working women, especially single parents, should begin planning for their child’s future by buying term insurance. This will ensure that even in case of the parent’s untimely demise, the child’s education doesn’t suffer. Women, as mentioned earlier, at times tend to be over-cautious in their investments. Many of them invest 100 per cent in debt even for long-term goals such as child’s education [where the typical investment horizon is 18 – 21 years]. Remember that the cost of education in India has historically grown at a faster pace than a broad measure of inflation such as the Wholesale Price Index [WPI]. The only hope you have of meeting this goal is if you have a considerable portion of the education corpus invested in equities [75 – 80 per cent].

Conservative investors may opt for balanced funds with 65 per cent equity allocation. Remember that liquidity becomes a very important factor at the time your child starts college education: you will need money at the time of admission and then continuously for the next few years. It will not help if your money is locked up in illiquid instruments that will mature at a later date. Do keep this very important factor in mind when saving for your child’s education.

Avoid branded children’s products either from insurance companies or mutual funds. Instead invest in high-quality diversified equity funds from mutual fund houses [these typically get more attention from the fund manager than child plans because they have a larger corpus and hence earn the fund house more money].

Three years before you approach your goal, start shifting your savings from equities to debt, so that a sudden downturn in the markets does not affect your child’s prospects.

Investing for retirement

Investing for retirement is also a long-term goal where the investment horizon is of 25 years or more. Only by investing in equities will your portfolio be able to counter the ravages of inflation. Women who have an appetite for risk may opt for a 100 per cent equity portfolio. Those who are risk averse may opt for a mix of 75 per cent equities, 20 per cent debt and 5 per cent gold.

Active or passive funds

Those who use the services of a financial planner or know how to choose the right mutual funds may opt for active funds in their retirement portfolio. If you invest in them, monitor their performance. If a fund’s performance falters, switch to another with a sound long-term track record. If you don’t want the hassle of monitoring the performance of active funds, opt for an index fund which will give you returns in line with that of the benchmark index upon which it is based.

Allocation by market cap

Of the total equity portion of your retirement portfolio, allocate 70 – 75 per cent to large-cap or large- and mid-cap funds. 25 – 30 per cent may be allocated to mid- and small-cap funds.

Allocation to debt

In a long-term portfolio, such as for retirement, meet your debt allocation by investing in Employee Provident Fund [if you are employed] or Public Provident Fund [PPF, if you are self-employed] or both.

Allocation to gold

In a retirement portfolio 5 – 8 per cent may be allocated to gold. This will give greater stability to your portfolio and also enable it to fight inflation.

As your retirement approaches, shift your corpus from equity to debt, especially if the corpus is small-sized and a decline in the market will affect retirement income. Very large corpuses can weather market volatility [in the sense that if the corpus size declines from 80 crore to 60 crore, it will not affect the retiree’s lifestyle]. Even after retirement have at least 20 – 25 per cent of your retirement corpus in equities so that it can continue to fight inflation over the quarter century of your retired life.

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Here are a few traits of Dhoni that investors would do well to emulate.

Captain Cool

Dhoni is famously known as Captain Cool. There is an imperturbable quality about him. He doesn’t get worked up in tense match situations. These qualities of grace under pressure and not buckling under the weight of expectations have helped him achieve great heights in his career.

A calm temperament is a great asset in the field of investment as well. When the markets tank, most investors lose sleep as they see the value of their portfolios shrink. Warren Buffett has said that you should be greedy when others are fearful and fearful when others are greedy. In a bear market, investors should be able to coolly evaluate which high-quality stocks have become available at a bargain and snap them up. Instead, most of them are either unable to invest more in equities, or worse still, sell their equity holdings altogether.

A calm temperament is a great asset in the field of investment as well

Persistence

The game of investment requires similar tenacity. If most of your investments are in equities—as they need to be if you wish to build wealth over the long term for goals like retirement, children’s education and marriage—then the ride is not going to be smooth. Equities typically do well for one spell and then underperform thereafter. Sometimes the bear market can be prolonged. But the long-term course of equities is upward. Only investors who have the strength of character to stick to their asset allocation and persist with their systematic investment plans [SIPs] when the markets are doing badly will build wealth over the long term.

On the other hand, those who hop from one asset class to another, i.e., from the one that is doing badly to the one that is doing well, will always end up buying assets when they are expensive and selling them when they are cheap. This is the exact antithesis of the approach you need to adopt to build wealth.

Not buckling under the weight of expectations has helped dhoni achieve great achieve heights in his career

Calculated bets

Dhoni does take risks but they are well-calculated ones. He does not have a reckless, all-or-nothing approach. This is reflected in the composition of the teams that he fields. Depending on the sort of pitch that the team will play on, he may take an extra spinner or an extra pace bowler. But he rarely goes with an all-pace or all-spin attack.

An investor too should make calculated bets. Warren Buffett and his partner Charlie Munger often give the analogy that they have mastered the art of vaulting over small obstacles rather than very high ones. Mohnish Pabrai of Pabrai Funds also says that investors should make bets only when the odds are overwhelmingly in their favour.

As for an investor who follows the asset allocation approach, the strategic allocation of his portfolio should be determined by the nature of his goals. Within that he may make some tactical variations. For instance, a typical investor may have an 8 – 12 per cent or 5 – 10 per cent strategic allocation to gold in a long-term portfolio. He may tactically shift his weightage depending on the performance of the asset class, moving to the upper end of that range when the asset class is performing badly [buy low] and to the lower end when it is performing well [sell high].

Dhoni does take risks but they are well-calculated ones. He does not have a reckless, all-or-nothing approach

The Finisher

Dhoni is known to be one of the finest finishers in one-day cricket. Given his position lower down the batting order, he often comes in to bat in the wake of a collapse in the middle order. He has the art of being able to pace his innings well. For the greater part of his innings, he will steal singles and twos and hit the odd boundary. But he rarely goes for fireworks at the start of his innings. It’s only towards the end that he breaks the shackles and accelerates with towering hits.

The ordinary investor, too, needs to pace his investments well. But here things work in the opposite manner. When you are young and are many years away from your goal, you have the liberty to take higher risks. You can put a larger part of your corpus in risky assets like equities. The reason: even if the markets fall and stay down for a long time, you don’t need to worry as time is your ally. In a year or two, the equity market will recover and resume its upward journey.

As you get closer to your goal—say when you are five years away from retirement—you need to reduce the risk in your investment and move a larger portion to fixed-income assets, so that a downturn in the equity market does not affect your retirement plans.

When you are young and are many years away from your goal, you have the liberty to take higher risks

Know your limitations

Dhoni has stuck to his primary role of wicket—keeping throughout his career. Despite being regarded as a good batsman—he has an average of above 50 in his one—day career and nearly 40 in his Test career—he has stuck to the lower middle order and has not promoted himself up the order. This is the sign of a man who knows his strengths and weaknesses and works well within his limitations.

Investments too require you to have an acute awareness of one’s strengths and weaknesses. Buffett advises all stock market investors to invest within their circle of competence. He says that they should not invest in sectors or industries that they know very little about.

Often, investors over-estimate their abilities, oversimplify the investing process and adopt a do-it-yourself [DIY] approach. Investing is difficult and they would do well by having a competent financial advisor. Remember, it’s for a reason that even the best sportspersons have coaches.

A version of this article was first published in the November 2015 issue of Complete Wellbeing.

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Sounds familiar? Then this article is for you.

Earning a living is no walk in the park, what with trying to keep the nose to the grindstone, shoulders to the wheel, eye on the ball and ears to the ground. One rarely has the time, energy and inclination to worry about when, where and how to invest. Plus, this tax saving thing is so tedious and boring. Some money ‘has’ to be invested to get you a tax deduction. Bottom line—less TDS [tax deduction at source] and more income for the rest of the year. That’s all Priya was concerned with, then why bother with the planning and details, right? Wrong.

Because the cheque written today has got enormous ramifications on your finances tomorrow. So you better know what you are doing.

Make the effort

Assuming you are serious about your job, you must be spending the better part of your day giving it your blood, sweat and tears. In return, you are paid a salary. Even for the self-employed, it is no different. This income helps you to spend and save money for the future. So just because something seems tedious and boring, it shouldn’t be used as an excuse to be careless about money. Especially when it is neither tedious nor boring, but actually simple and straightforward. And the ten minutes that you spend reading this article is all it really takes. So do make the effort and it will pay you rich dividends—pun intended.

Understand the basics

First of all, let’s understand that the maximum amount of tax deduction allowed is Rs 1,00,000. Out of this, take out the total amount of provident fund [PF] deducted from your salary during the year. Of course, for the self-employed, this figure would be nil. Those who have taken a housing loan should also reduce the principal portion of the EMI [equated monthly installment]. Now the balance left needs to be invested.

For example in Priya’s case, the PF was Rs 60,000 for the year and she lived with her parents. So she needed to invest Rs 40,000 [Rs 1,00,000 – Rs 60,000] more to reach the limit. Now, she can invest this Rs 40,000 in a variety of instruments such as bank deposits, life insurance, NSC, PPF, ELSS [tax saving mutual funds] and Post Office deposits. Space constraints preclude a detailed discussion of the pros and cons of each one of these instruments. So, I will spare you the ‘tedium’ and ‘boredom’ and directly get to the point.

Simply invest

Instead of depending upon your colleague, ignore everything else and simply invest in a combination of ELSS and PPF. If you are relatively young and just starting out, put 70 per cent into ELSS and 30 per cent into PPF. As you advance, lower the proportion in ELSS funds and increase the proportion of PPF eventually reaching a 30 per cent ELSS and 70 per cent PPF combination. Of course, since each person’s situation is different, taking the advice of a financial planner [as against an agent] would be better than this kind of template investing—however, it would beat the last minute frenzy any day.

Now that the tax saving is taken care of, lets go a step ahead. Beyond a point tax saving is simply not possible. So don’t fret about saving tax, worry about optimising post tax income. How do you do it?

Perhaps by making a small modification to the usual mindset. Normally, the amount we save out of our incomes is what we call savings. In other words, Income minus Expenses equals to Savings. Now, for the almost presumptuous suggestion. How about Income minus Savings equals to Expenses? It’s the same equation, but redrawing it is infinitely more efficient as far as our finances are concerned.

Start small

So starting next month, pre-decide how much you want to save out of your income and the balancing figure should automatically make up your expenses. Take care not to set too ambitious a target, or you will end up just strait-jacketing yourself and give up soon. So start small and make the adjustments as you go along. This strategy introduces an element of financial discipline and ensures that you don’t feel too much of a pinch.

Be an early bird

This holds good for anyone with an income. You need not wait till the last minute and take decisions in a hurry. The early bird gets the worm. You can be that early bird by investing in tax-saving avenues at the very beginning of the financial year, even on April 1. Doing so has a two fold advantage. Firstly, your tax saving investments will earn returns from the beginning of the financial year [April-March]. Secondly, you will not have to worry about paying a lump sum [which you may not have] at one go at the last minute.

There is no compulsion to invest for tax only towards the end of the year. A much more efficient strategy is to invest throughout the year in a staggered manner such that by the time the financial year comes to an end, you can take full advantage of the tax saving opportunity. And don’t worry about how much or little you save each month. As Benjamin Franklin has so succinctly put, “A penny saved is a dollar earned!”

This was first published in the January 2009 issue of Complete Wellbeing

The post Personal finance: start early, plan yearly appeared first on Complete Wellbeing.

Published by: Jaico Books

ISBN-13: 978-81-8495-577-4

Pages: 229

Price: INR 229

The rich get richer, “I have to make it to the Forbes list,” they cry. The middle class get deeper in debt—“Sales online… just a mobile app away,” they sigh. And the poor seem to be getting poorer—“Daal mein aur thoda paani dalo,” to make the meal go around.

Whichever group we may belong to, our quest for money is soul-searing. Along comes Mehrab Irani who promises you financial nirvana, but only if you follow his ‘10 commandments of financial freedom’, which he introduced using a fictional account of two friends.

Dr John Pinto, an orthopaedic surgeon in posh South Mumbai, seems to have it all—a great job, an extravagant lifestyle and a loving family. And yet, at the age of 45, he tries to take his life—an attempt that is foiled by his childhood friend, Vijay Desai. The contrast between the two men is a dig at the Indian educational system. John, who had a brilliant academic career, failed himself spectacularly in life. But Vijay, a school dropout, rose to be not just an international business tycoon, but one with a heart.

When Vijay learned that John’s suicide attempt was brought on by his dwindling finances, he decided to take his friend—and the reader—on a financial pilgrimage. As you travel along with them, you visit not only the Meccas of money [New York and London] but also the massage parlours of Bangkok, the remote mountains of Afghanistan, the Australian outback, Kenyan safari, Kruger National Park and Shanghai water town amongst other places. The teachers of the 10 commandments are as exotic as their locales. There’s an ex-porn star, an ex-terrorist, a marathon runner and, predictably, an ex-Wall Street investment banker. The one factor they share in common is that they are all protégés who have been ‘rescued’ by Vijay and taught financial emancipation, which they will now pass on to John.

The author’s skills as a teacher shine through in this book. Each chapter deals with a single financial precept—equities, real estate, insurance, budgeting, allocation of resources and even speculation. The lesson is embedded in parable and brings out the connection between man and money. The financial lesson is summarised at the end of each chapter feels like the moral of an Aesop’s fable. Sometimes, these lessons seem repetitive but I guess that is necessary for reinforcement. At times though, the lesson is difficult.

As the main aim of the book is to make you financially savvy, you will need to overlook some small flaws. The character of Dr John Pinto is sketchy and rather unconvincing. Most of the author’s aphorisms seem to be largely drawn from ‘inspirational internet forwards’ but what works is the way he neatly weaves them into the story. While the underlying lesson is clear, the attention to detail is lacking and this tends to take away a bit from the story.

The New York chapter is the most compelling with an entertaining and brilliant lesson on investing in equities. I am sure this is what prompted Rakesh Jhunjhunwala to call his book “a page turner that will permanently change the way you look at life and money.” And I heartily agree!

This was first published in the November 2014 issue of Complete Wellbeing.

The post Mad Money Journey: A Financial Adventure By Mehrab Irani appeared first on Complete Wellbeing.

Even a brief period of sinful investing can have a serious, negative impact on your long-term financial goals. The seven deadly sins cause investors to violate two holy rules: the first rule is that you must always measure your ‘real’ return—your return with inflation, taxes, and fees factored into the equation and without rationalizations—on investment. The second rule is that you must evaluate every investing decision in light of your long-term goals.

The good news is that the sins don’t have to control your investing, and I’ll offer advice that will help you manage your worst impulses.

1. Envy

No matter how good an investor you are, someone is always better. It is perfectly natural to be envious, and it only becomes a problem when you’re not aware of your envy or when you deny it. In the former instance, you don’t realise that a conversation with a colleague at work about her investing success is pushing you to make a particular type of investment. In the latter instance, you’re buying a particular stock because your older brother did great with it and you’ve always had an extremely competitive relationship.

Keeping envy three steps away

1. Examine your motivation deeply. When your motivation is to hit the jackpot, ask yourself if you recently read about or talked about someone who hit a similar jackpot. If so, envy may be compelling you to act as you do. Solicit advice from others you trust about the investment. Do they consider it wise? Would they make a similar investment? If they are wary of it, you should be too.
2. Demythologize the object of envy. We assume our colleague at work has a “green” thumb, or the investment guru whose newsletter we receive is so brilliant that he can chart trends in ways that most mortals can’t. We elevate these people to a status that they usually don’t deserve, and that makes us so envious. Demythologizing these individuals can make us less envious and less prone to investing mistakes. When we see that someone was merely lucky or his windfall was the result of years of study and hard work, envy loses its power over us.
3. Identify what you really want and if investing is the best way to get it. When you’re envious of someone, you’re actually envious of what they possess. What you want is what they have—the luxury car, the security of having a pile of money or the vacation house. Consider whether investing is the best way to achieve this goal. Determine alternative ways to get what you want: A savings plan, a better-paying job and so on.

These steps don’t stop you from envying another person. Instead, they decrease the odds that the envy will get in the way of your investing.

2. Vanity/Pride

An excessive amount of pride causes you to rationalize data that might make you look bad as an investor. It can also prevent you from taking good advice from experts. Overly proud investors are ingenious in coming up with justifications for their investment strategies. Their vanity drives them to create plausible-sounding arguments to avoid the conventional wisdom and go off on their own.

How to keep pride getting in your way

1. Make a concerted effort to seek advice and knowledge, and try to take pride in your ability to discern useful from useless information. A wealth of information exists that is greater than your personal knowledge. Make it a habit to read an article or newsletter, visit a Web site, and talk to someone whose investing expertise you respect at least once a week. Use your own analytical ability to decide whether what you hear and read is worth acting upon.
2. Substitute change-awareness for ego in making investment decisions. Recognize that you are not stupid because a good investment turns bad. Change-related factors are beyond your control, and smart investors make sure they are aware of changes and limit their losses, even if it means selling at a loss. They refuse to “save face” by clinging to a bad investment and hoping against hope that it turns around.
3. Don’t try to outsmart the market. Approach the market with humility. Adopting a Zen-like attitude—recognizing that you are a speck in the universe of the market—puts things in perspective. The best investors really do go with the flow; they are open-minded, flexible, and contemplative. They are in tune with the market, understanding it as well as they are able and are attuned to its nuances. They are not so presumptuous as to believe that they can stay one step ahead of the market. Instead, they attempt to move in harmony with it.

3. Lust

Lust may seem an odd term to describe an investing relationship, yet the characteristics of lust—obsessiveness, possessiveness, desire—are also traits that just about every investor has experienced. People fall head-over-heels in love with stocks that perform well. They become infatuated with strategies that they believe are foolproof. They lose their logic and operate strictly on emotion when they become obsessed with a certain fund.

Lust prevents us from viewing our investing with logic and insight. We become so wrapped up in our investing obsession that we can’t take that crucial step backwards and observe our investing self with any degree of objectivity.

Antidote to lust

Diversify—spread your love around. We live in an unpredictable, volatile world, and unless you are truly diversified, you are likely to be burned.

4. Anger/Wrath

Anger flares up faster than any of the other sins and it can be so powerful that before you know it, you’ve made an ill-advised investment. Angry investors always find something to be furious about, and it doesn’t have to be an individual; it can be a particular investment, the economy, or even fate. Some people are so irrationally angry that they take a dip in the market personally and vow vengeance. You get hit, you hit back. But this is a counterproductive reflex, one that causes you to make decisions in the heat of the moment that can cost you a great deal later on.

How to stop your rage from getting the best of you

Here are the signs of anger and how to deal with them:

1. A red-hot desire for vengeance. You want revenge against the market in general or a broker who you feel gave you bad advice. If this sounds like you, you need to give yourself a ten count.
   Specifically, wait ten days before making any investment decisions. This ten-day cooling down period is useful, since the desire to exact it is immediate and commanding. You need to step away from what’s pushing you powerfully toward a decision that may not be in your best interest. Time usually takes the edge off the desire for vengeance.
2. Fury at yourself or others for making “stupid” mistakes. If you’re furious at yourself or others for doing something stupid, your impulse is to act immediately to get rid of that feeling of being stupid.
   To diminish that feeling of being dumb, understand what caused you to be victimized: A failure to do your homework about an investment or source of advice; bad luck; stress and lack of time to make a thoughtful decision? Detail what you might have done to prevent the idiotic mistake.
3. Anger at the poor performance of an investment. We’re so angry at how the investment performance thwarted our expectations that we want to do something about it. In most instances, watchful waiting is a better response.

Certain types of investing trigger anger in certain investors, you should do everything possible to avoid these types. Specifically, don’t:

• Seek highly volatile, microcap stock investments
• Buy a stock just to catch the momentum trade
• Invest blindly based only on a friend’s or a colleague’s recommendations or some other type of rumor or inside tip
• Trade on the day that news comes out.
• More strategies to deal with anger:
• Force yourself to take breaks from the investment world in general and your portfolio in particular
• Remind yourself that it’s business, not personal
• Keep an investing/anger journal
• Vent your anger productively.

5. Greed

Greed is a tricky subject when it comes to investing since the point of this activity is to make money. From a sin-based perspective, however, investors cross the line when they desire to make too much money too fast; when in their rush to make piles of money, they forget to do their homework and their expectations are wildly out of line with reality. Driven by greed, investors tend to jump on bandwagons too late and stay on too long, or they invest heavily in a stock that on the surface looks like a winner but quickly turns into a loser. They invest dreaming of riches, and these dreams distort their reasoning. A sure sign of greed is when you look at investing as the answer to your prayers, as a way out of a career that’s going nowhere or as a way to purchase something that you normally couldn’t afford.

How to keep your greed under control

1. Invest slowly, knowledgably, and logically. Speed, ignorance, and reflex are the greedy investor’s enemies. Force yourself to move relatively slowly before making an investing decision. It helps because it gives you a bigger window of time in which you can think, reflect, learn, and talk about an investment. Greed preys on people who just react.
2. Be careful about trying to duplicate past successes. Whatever it is that worked, don’t automatically assume it will work again. In fact, it probably won’t. Things change so quickly that the conditions that helped a given investment work in June probably won’t exist in July. Therefore, don’t let your greed lock you into an unthinking investing pattern.
3. Train yourself to spot ‘’fool’s gold” investments. Greedy investors are drawn to stocks that look like pure gold. To avoid being similarly blinded, employ a certain amount of healthy skepticism when you encounter a skyrocketing stock. Force yourself to count to ten [figuratively speaking] and use that waiting time to do your homework. Remind yourself that most of the time, these incredibly, money-making stocks are not what they seem.
4. Satisfy your greed through a 5 percent limit. Limit the amount of money you put in “speculative” stocks and funds to 5 per cent of your total investments. This limit will minimize the damage you do to your portfolio and perhaps satisfy the greed demons that drive you.
5. Remind yourself daily that the market punishes the greedy and rewards the patient, long-term investor. Despite all the stories you may have heard or read about people becoming phenomenally wealthy through their high-investing strategies, the individuals are anomalies. At best, they are playing a zero-sum game in which they win a lot and then lose a lot.

6. Gluttony

Gluttons are addicts, only instead of being hooked on food they crave the action of trading. They operate on the assumption that more is better; that the more stocks, bonds, and funds they buy and sell, the better their results. They are never satisfied with their portfolio and always feel compelled to change it in some way. The action of investing is the only thing that satisfies them for a brief period of time.

Gluttony makes it virtually impossible to have a successful, long-term strategy. Constant buying and selling not only results in high transaction costs and taxes, but makes it more difficult to be objective, reflective, and analytical.

Put yourself on an investing diet

1. Reserve 5 to 10 percent of your portfolio for aggressive trading. You enjoy and need the action of buying and selling. What you don’t need is for this need to eat away at your portfolio. Therefore, reserve a small percentage to feed this habit. If you only actively trade 100 shares instead of 1,000, you probably won’t do much damage.
2. Limit your active trading to a tax-deferred account. Limiting your active trading to tax-deferred accounts will help you avoid paying big short-term capital gains taxes.
3. Refuse to invest in the stocks and funds that everyone is talking about. The stock that is rated a “buy” by 20 out of 21 brokerage firms has great expectations already built into its price; the majority of people have already discovered and bought it, and the odds are against a significant number of additional people flocking to the stock and helping further inflate its price.
4. Substitute buying “beaten up” stocks for high-performing ones. To satisfy your craving for action, look toward solid stocks that have taken a beating. Find a company that has a stellar reputation, a history of good performance, and other outstanding attributes, but has experienced problems that have depressed the stock price. If you can find the window when the price has fallen lower than it should, this is the moment when your impulse for action can serve you well.
5. Increase benchmarking. Every investing glutton should make a practice of comparing their portfolio’s performance with various market benchmarks.
6. Reduce the number of trades gradually. Don’t immediately try and go from five investments a day to one a week. You’ll find this radical transition tough to maintain. Instead, diminish your trades incrementally. Go from five trades a day to one or two a day. In a few weeks, reduce this number to three or four trades weekly. Then go to one trade a week.

7. Sloth

Sloth is a sin of omission rather than of commission. For this reason, it is more difficult to identify, categorize, and prevent. Sloth manifests itself in many different ways, but its manifestation involves laziness, forgetfulness, procrastination, and rationalization. In other words, it takes the form of thought rather than action. Slothful investors wait for opportunities to come to them rather than seeking out opportunities. Sloth is also a sin of varying degrees. Some people are extraordinarily, consistently lazy about their investing while others are only fitfully slothful. On a sloth continuum, the following four points exist: A little lazy, erratically engaged, generally disinterested, a complete slug.

Fighting lethargy and inaction

To break this habit, establish a new routine.

1. Set up an e-mail alert. If you are managing your money yourself and buying individual stocks, the e-mail alert will automatically and regularly provide you with the earnings release of the companies you own.
2. Review your monthly statement with a sharp eye for changes. Be alert for any significant changes. Look at your asset allocation and determine if some event has shifted the balance such as a bond that matured.
3. Determine how your mutual fund did versus the average mutual fund in the same category or how your advisor did compared to a well-publicized market index. Make this determination based on several time horizons such as the quarter, year, and a multiyear period. This way you’ll get a sense if you’re doing good, bad, or average.

In addition to incorporating these behaviors into your routine, designate a specific time and day for each of them. Determine a daily or weekly time when you will look at your e-rnail alert; identify when you’re going to set aside thirty minutes or so each month to review your statements; figure out when you can spend an hour or two evaluating and comparing your mutual fund and advisor performance to the market. Mark these dates and times on a calendar and stick to them. At first you’re going to have to make a conscious effort to incorporate them into your routine, but after a while, they will become habit.

Being conscious of the seven sins and vigilant for how they might impact your investing decisions is how you can take advantage of the market.

Note: To maintain sanctity of the source, this article follows American English.

Excerpted with permission from 7 Deadly Sins of Investingby Maury Fertig | Published by Jaico Publishing House; ISBN-13: 978-81-8495-270-4;