Saving for future and life goals is one inevitable and necessary thing everyone must do. Off-late there has been a lot of hype about doing the smart work, the investment industry also appreciates the smart work investors put in, in order to build and sustain a rewarding portfolio. Generally, the investments lead to the realization of major 3-5 life goals of an individual like self-marriage, home, child education, child marriage, and retirement.
There are several rules and mandates that apply universally to all types of investing and investors. Here are a few parameters that every investor much check while making any investment-related decision to become a smart investor.
Take the emotion out of investing
Emotional investing has proven to be a curse to investors. A lot of people out there invest in a particular fund just because they feel connected to it. This is not the right approach to fund selection rather your decision must be backed by proper facts and numbers and a well-researched selection criterion. Once you have invested in the funds of your choice, do not react emotionally to every movement that happens in your stock’s performance. There will be times when the star performer will hit the bottom line and the under-performer will shine like a bright star. Remember, the market works in cycles and it is only a phase. Your best effort should be intended towards encashing the running cycle to your best advantage.
Patience is a virtue
Nobody in this universe became wealthy overnight. Noe can you accumulate knowledge in one day. All of it is a gradual process that is realized over the due course of time. Similarly, investment reproduces benefits over a period of time. You need to stay patient and practice practicality. There will be times when you will feel an urge to sell off every stock you have or buy as many stocks as you can, do not act foolishly. Since the market works in cycles, what is bearish today may become bullish tomorrow and vice versa.
The most important aspect of investing is the preservation of wealth. Before you make any decision relating to your investment portfolio, make sure that it does not hurt your capital strength in the long-term.
Deter any form of enticement
There will be a lot of temptations offered to you in the form of investments and false investment promises. Be aware of these temptations and do not get lured into investing in wrong investment avenues. It would be advisable to avoid companies which have a spiky trend. Companies that have a regular and consistent past trend especially in paying out dividends are the most reliable ones.
Know your pocket before you invest
A huge mistake that investors generally commit is of pushing in money into investments that are out of their limits. There have been investors and traders who suffered a major downfall as they supplied in borrowed money into the stock market and lost it. Also, before you invest in a company check for its history for at least 3 to 5 years. Do not go for businesses that need a regular and large amount of leverage to generate returns and do not believe much in paying out dividends.
Consider free cash flow as a foundation for your analysis
Free cash flow basically is the amount of money left at hand after deducting capital expenditures from the cash from operations. These may also be called savings in layman terms and can be used as a parameter to judge a business for investment purposes. FCF is an uncomplicated method of measuring if a company is worth investing in or not. The more the free cash flow a company beholds, the more it has for reinvestment purposes and dividend pay-out.
One thing that needs to be considered is that observing FCF is significant over the long term, take the trends of at least last years to measure the company’s viability.
Before making any investment decision, keep in mind that capital preservation comes before capital generation.