When one invests in any asset class there are factors that drive returns. While a few factors are in our hand, the others are not. Especially for short term investments. While investing for long term it is expected that the price of an asset discounts everything and hence is considered as a rational price. However, for the short term, there is often a time difference between the traded price and the actual value of that investment. For instance, when the market witnesses a decline, the price of an asset trades below its intrinsic value. There is hardly anything one can do despite the fact that what we hold has a higher intrinsic value. But market forces are such that one can hardly do anything about it. However, while one may feel helpless in such volatile markets – there are 4 factors that one can control when investing. Let us look at one of them in detail as below.
Control Brokerage Cost
The first factor which one can control is the brokerage cost. While it is a compulsory cost, investors usually tend to ignore it and hardly give any importance when investing. Not many people do their research right when selecting a broker. Thorough research is something one must not skip. In an era when almost everything is available online, researching is not a tough task.
There are few discount broking options that are available. These discount brokers help the investor in saving brokerage cost. While it is true that the broking cost has considerably come down. It is still a compulsory cost and can be managed properly if in-depth research is done. With discount broking, we achieve one target of trading by saving a little on the brokerage cost.
However, the task does not end here. One should also take care of a few things. With fast paced lives, people tend to buy at market price which actually impacts their cost, thus eventually impacting brokerage. For those involved in day trading, this is of utmost importance.
Always set a price at which you want to buy. If the scrip comes at those prices then only do the trade. So this helps you in trading rarely rather than trading frequently. Again patience is a key here. So, in a nutshell - trade rarely, trade patiently and most important; cheaply.
Control Ownership Cost
Another thing in markets, especially while investing in mutual funds is the ownership cost. One can control the investment cost by refusing the mutual fund investments with excessive annual expenses. Though it is the right of asset management companies (AMC) to charge fees, some overcharge the investors in terms of management fees and advertising expenses. Avoid the AMCs charging higher fees. Expense ratio in the long run makes a significant impact on compounding in the long run. Always try to keep the ownership cost lower.
Control Your Expectations
When it comes to investing we have certain expectations about the returns from investment. Whether it is equity or mutual funds, such investments can only provide sensible returns that are comparatively better than the risk free returns one can generate. Remember, it is a myth that equity investments can double one’s money in no time. Since 1991, the Sensex has provided a CAGR of 16 plus per cent. So, when we invest in equity or mutual funds, anything inline or marginally above 14-16 per cent CAGR is realistic. The bottom line being - be realistic. Do not expect any fancy or extraordinary returns from equity markets.
Control Risk Appetite
This is a crucial factor. One needs to decide how much to put at risk while investing. People tend to get attracted by fancy returns expectations and put in all the resources at work. It is important to understand the difference between risk appetite, risk capacity and risk tolerance. It is advisable to keep only that money in equity markets which will not impact your financial stability if lost. Else, we would advise opting for mutual funds based on their financial goals.
Control One’s Behavior
Here one must understand a quote from Benjamin Graham, “It is not about beating others at their game. It is all about controlling yourself at your own game.” So, control your own behavior in terms of herd mentality or reacting to rumors. Everyone tries to beat the indices or benchmarks.
We’d like to quote an investment anecdote to explain this point. At an investment forum, there was a question asked to an investment wizard, ‘Did you manage to beat the index or benchmark?’ The wizard said, “Honestly, I don’t know! I have made so much that they call me amazing.” The lesson here is that one gets an answer and a good investment strategy too. It’s not about beating the index or benchmark, it’s about meeting one’s financial goals.
Conclusion: It is important to control things that are controllable and act accordingly. For instance, in volatile or turbulent times it is important to control one’s behavior. In other cases it is important to understand the risk appetite and so on as per one’s financial goals. Try not competing here.