Investing for a lifetime

Set aside money for emergencies

There are many reasons why you might need access to a substantial sum of money at short notice,such as an unplanned purchase,or a medical emergency. A good rule of thumb is to set aside four to six months worth of your average monthly income aside in cash,or in very ‘liquid’ instruments (i.e. those that can be converted to cash at short notice,such as cash funds).

Understand your risk tolerance

Each of us is unique in the amount of risk we are willing to subject our money to. Do the ups and downs in the stock market give you stomach ulcers and sleepless nights? Or do you have a good amount of capital earning sufficient regular income that satisfies your general expenses,and wish some of your money was generating higher returns?

The answers to these questions will give you an indication of your risk tolerance,and you should allocate money between stocks and bonds based on them.

Develop a financial plan with your advisor

Talk to your investment advisor to develop a ‘roadmap’,or your own personal financial plan. As part of it you would need to identify

* What your primary life goals are,and how much money you will need to attain them

* The amount of money you will need for regular expenses and contingencies,should they arise

* How you would beat the corrosive effects that inflation will have on your money over time

* The time you should remain invested to reach your goals

Choose your financial instruments

You may fancy yourself an expert stock-picker,but most of us do not have the time or research capability to pick winning stocks all the time. Mutual funds are therefore the best way to quickly and efficiently buy a basket of stocks or bonds,hand-picked by professional portfolio managers. This way,you can achieve a high level of diversification and quality returns through a few good funds,and at a fairly low cost,too.

Here are the 2 key benefits mutual funds provide over direct investments or deposits :

* Tax benefits as dividends are not liable to be taxed in the hands of the investor and capital gains benefits versus taxes on interest income.

* Gains on trades done by the fund manager are not taxable while each trade you would do on your portfolio would be taxed.

Invest regularly

We may be tempted to invest when the stock market is on a tear,and pull money out when we see it fall,but this is the wrong approach. Investing regularly,through market ups and downs,is the way to save for the future. When the market falls,you are able to buy your funds at a lower unit price. When it rises,your existing units gain in value. Ask your advisor about systematic investment plans,which will help you invest regularly.

Stay the course

Research has shown that missing just the ten best days of stock market performance in the last ten year period (up to 30th June 2011) would have delivered just 9.84 per cent in annual returns,vs. 18.47 per cent if you had remained invested throughout the entire period. Also,stick to the asset allocation that your advisor has determined is best for you,and rebalance your portfolio regularly to maintain that mix. This means that when one part – let’s say,bonds – gains in value to the point where your asset allocation is not being maintained,sell some bonds and buy stocks to maintain the right mix. This way,you are buying low and selling high,and that is what investing is all about.

—Author is Country Head,Fidelity Worldwide Investment