Stop, Look, Walk: The Traffic Rules of Careful Investing

"I invest in SIPs in equity." My colleague was brimming with pride. After all, he had arrived. He had been investing in an instrument (SIPs or Systematic Investment Plans) which was unknown to the guru of investing in the bunch-me. What the poor fellow did not realize was that he had been duped. He had been taken for a ride by one of the knights in this great war of selling. He had been a victim to a crime which could never be proved. On my part, it took me great patience and grit to make him realize this simple fact. And the after effect of which is what this article is all about.

Over the years investment avenues have increased many folds and the investor these days is spoilt for choices. But hidden at the core of these choices is the one mantra of investment-profit. If some instrument is not fulfilling this basic principle it is better to stay away. Before you invest follow these basic three rules:

1. Stop:

This first step is also meant to be a sign of caution. Do not invest in a particular instrument because someone else is doing it. Do not invest because someone is advising you to do so. Do it only if you are able to satisfy yourself and that one instrument has answers to your questions.

Stop does not mean stop investing. It means stop and plan. Understand your needs and your goals. What are you looking for when you say you want to invest? Do you want to save tax? Do you want to multiply your money? Or do you just want to have some extra income? How much risk are you willing to take? These are a few questions you should ask yourself before you decide to jump in. Take a piece of paper and write these questions down. Put your answers beneath these questions. By the time you are done with the exercise, you will have a clear understanding of how your investment strategy should be.

2. Look:

The second step is to look for that suitable instrument of investment. After the first exercise, you should have a very clear picture of your needs and your goals. Start looking in the market for something that suits your needs. Look for information in websites, discuss with friends and colleagues and seek advice from your favorite banks. But do not jump to a decision yet. There is still research to be done. Once you have shortlisted at least five instruments, jot down their purpose on the same piece of paper where you have answered your questions. And now you should have a clear picture of what you need.

If you are a high risk taker and need quick gains, go for equities. If you want your money to be safe with appreciable interest go for fixed deposits or savings linked mutual funds. If your goal is to save tax and at the same time let your money appreciate then go for government bonds or tax saving schemes. Decide on which institution will get you the maximum gains.

The next step is to walk. If you miss the calamity when you are looking, you might end up being hit when you actually decide to walk. So be careful when you look. Take your own time and take your own decision before you decide to finally put your step forward.

3. Walk:

If you have done your homework in the Look phase you should have no trouble in this phase. But once you start walking, do not look back. If you miss one chance at crossing the road, you might have to wait for the next signal before you can try again. Opportunity only knocks once before the next signal doesn't it? It is easy to be misled if you stop or look when you should be walking. Do not let what others say bother you since this decision to walk has been your one decision and no one has influenced you. If you are confident about your decision, nothing should be able to shake you.

The most important part of investing is to realize when you have made a mistake and then have the guts to rectify it. But even after realizing withdrawal at an inappropriate time can only spell more doom. It is absolutely necessary to cross the road first. Once you are on the other side, sit back and recalculate where you want to reach and how you can get there faster. The instruments are roads and it's up to you to decide which one you want to take up.

It is easy to fall prey to people who promise to get you to your destination before the others. But before you listen to them, listen to yourself. Follow the simple rules of the road and the road will get you to your destination. Remember Rome was not built in a day and so cant your fortune. It takes extreme planning and great dedication to amass wealth of any proportion. The three simple rules will help you in your path to success and glory. Always remember to:

Stop!

Look!

Walk!