Become an intelligent investor

Gold

Example: I am sure gold will give good returns as the inflation is high and there is economic uncertainty. I will take out money from equity and invest in gold.

You would often hear that gold is a hedge against inflation,it has an inverse correlation with equity markets and it is a safe haven whenever there is global economic turmoil. However,a hard look at the data from 1980’s till now would suggest that gold has no direct correlation to any of the above. For example,gold touched the level of $ 850 in 1985 and then for more than two decades,it never reached the same level. It was only in 2008,that gold was trading on an average price of $ 870. Gold has not even given inflation adjusted returns. Inflation adjusted price of gold should have been $ 2,800. It is catching up with the past, says Rajnish Kumar,executive vice president,Fullerton Securities.

With the history of gold prices correcting after touching high levels and then stagnating for long periods,it may be a risk to assume that it will certainly give profit. “In India it is considered a safe haven with buyers almost sure about profit in the long term. But gold has now started behaving like equity with lot of volatility in the prices. It is becoming a speculative investment, adds Kumar.

According to the experts,it is prudent to restrict portfolio exposure to 20 per cent,as part of the overall asset allocation strategy.

Real estate

Example: I bought a property in 2004 for R 50 lakh and now it is worth R 1.1 crore. This gave me a return of R 60 lakh. Fantastic…why should I invest in anything else!

Though it sounds a brilliant strategy,the CAGR return on the above investment is only 10.4 per cent. This is one of those classical assumptions investors make,without doing some basic maths. The house in not yours till you repay the home loan. Do remember to factor in the maintenance and the interest cost that is involved, says Parag Parikh,Chairman,PPFAS.

Thanks to the high growth that India is witnessing,real estate has seen boom in prices in the last few years. This lead many people with investible surplus to look at real estate as a sure shot money making strategy. However,nothing can be far from the truth. Real estate,like any other asset class,moves in a cycle and once prices reach a high point,the correction is inevitable.

“If the appreciation on the house you are buying is more than the total EMI you would pay on the home loan,then only it makes sense to buy a house, suggests Mumbai based financial advisor Kartik Jhaveri.

You must not risk your hard earned money by speculating on real estate assuming that the prices would never drop.

Equity

Example: I am waiting for the lowest point (bottom) in the stock market. I will lose money if I buy now and the markets fall further.

Equity whether bought directly or through mutual funds is inherently a volatile asset class.

Equity is one of the riskiest asset class which is also known to give best returns provided one plays by the rules of the game though not too many people actually do it. As Benjamin Graham puts it in his iconic The Intelligent Investor All investors know that they should buy low and sell high. But in practice they do reverse (ie buying high and selling low).

Akshay Gupta,Managing Director and CEO,Peerless Mutual Fund says,many investors tend to get influenced by eco-system noise,which makes them either greedy or fearful. Discipline,correct advice and regular review of the investments with the advisor are critical for the investments to flourish.

Many times there are no rationale why one should hold on to stocks that are crashing,sell stocks that are rising,overvalue companies,and buy stocks that have peaked in a rally just before the price declines,and take unjustified risks. When the markets are down,they expect it to go down even further. When it goes down more,they believe it will go down even more. When it turns around and starts climbing,they again wait,expecting it to touch the previous low when they will buy. The average investor hence always waits for the right time and never buys, opines Suresh Sadagopan,CEO,Ladder7 Financial Services.

The best example is of IPO craze. Most of the people run for an IPO not because they see value in the company that wants to raise capital,but because of positive news flow about that particular company. The madness reaches its height when everyone starts believing that s/he can make money by selling on the listing day. There are umpteen examples,like Reliance Power,where people gambled their lifes savings,running after possible listing gains and ended up with less than half of what they had invested.

“People have the problem of pre-empting events. Traders and investors extrapolate the present trend and end up making losses, says equity expert SP Tulsian.

With gold at a record high price,expectations of correction in the real estate sector,and extreme volatility in the equity market,this is an ideal time for you to do introspection of your financial habits including how you arrive at an investment decision. There are no shortcuts to making money.Detailed research,expert’s advice and investment call made on broader asset allocation should be the focus. Any decision taken in a hurry or based on hearsay can wipe out your entire life’s savings in no time.

ritukant.ojhaexpressindia.com