In this blog post, we will talk about the 7 investing lessons for 2023. But before that, let’s quickly recap what happened in the markets over the past 3 years.
2020 – 2021 was a dream run for investors; interest rates were at an all-time low, employment was high and the stock market was booming. However, things began to change in 2022 with an unprecedented geopolitical crisis. With persistently high inflation, central banks all across the world started to rapidly increase interest rates causing both the equity and bond markets to fall drastically.
As we enter 2023, we observe ever-increasing interest rates, inflation, shortage of raw materials, geopolitical crisis, and global economic instability. The present investing environment needs to be treated with caution.
Here are 8 investing lessons that you should be aware of for a more informed investing journey
7 investing lessons:
1. Diversify your Portfolio
Diversification is the process of spreading your investments across different asset classes to reduce your portfolio’s overall risk profile. These different assets work together in a manner that ensures that they are not affected similarly by the same event. E.g. The COVID-19 crash of March 2020 led to huge losses in the equity/bond markets but was a good time to invest in Gold due to its perceived value as a haven during turbulent times. Investing randomly in many asset classes will not lead to diversification. Portfolio construction is a systematic and disciplined process which must be done correctly to reap the full benefits of diversification.
2. Utilize Tax Strategies
Use tax strategies to your advantage by combining investments and tax savings. For instance, you can save up to INR 46,800 in taxes by making use of the deduction u/s 80C of the Income Tax Act. Investing in ELSS funds is a great way to both save on taxes and earn long-term returns.
3. Research before buying
The ace investor Warren Buffet states, “Risk comes from not knowing what you’re doing.” Before making any investments, research the potential risks. Due diligence should be done to determine whether the investment is a good fit for your portfolio or not.
4. Have a high margin of safety
The difference between an investor’s purchase price for a company and its real or fundamental value is known as the margin of safety. Investments with a market price below their intrinsic value are given priority. Therefore, the difference between the investment’s actual value and market price increases with the size of the margin of safety. A higher margin of safety has the main advantage of reducing the investor’s overall risk.
5. Know your risks
Understanding the risks involved with each type of investment and how they might impact your portfolio is crucial. You can choose your assets more wisely if you know the risks. Another risk is receiving wrong advice from supposedly influential people. As a result, one should seek financial advice from SEBI-registered professionals rather than from people on social media.
6. Start early and invest for the long-term
Think about the long-term trajectory when making investments. The power of compounding is greatest the earlier you start. Instead of focusing on short-term price fluctuations, strive for fundamental long-term growth. An investor’s best friend is time, so get started early and benefit from cumulative returns for long-term gains.
7. Focus on what you understand.
Investors must always fully understand an asset class before they decide to invest in it. Not knowing it will expose them to unintended risks which they may not be fully capable of taking. For e.g. A lot of youngsters got attracted to Crypto over the last few years without understanding its nature and how it functions. As a result, the steep crash in 2022 caused a lot of them to re-evaluate their exposure to this asset class. Just because something is done by everyone around you doesn’t mean it’s relevant to you. Understand before investing.
1. Why is it important to know these 7 investing lessons?
It is said that history doesn’t repeat itself but it often rhymes. The same is true for investing in the markets. We should learn from what has occurred in the past so that we do not make the same mistakes again.
2. How can we apply these 7 investing lessons to our own investing journey?
By making yourself well aware of these important investing lessons, you will be able to invest more confidently for your future. Most importantly, you will invest based on your own risk appetite and in things that you completely understand.
3. What to invest in right now?
This depends on your risk appetite and your time horizon. If you want to invest for the short-term i.e 1-3 years, then invest approximately 70-80% of your money in bond/debt funds with the balance 20-30% invested in 2-3 diversified equity funds. However, if you want to invest for the long-term i.e 5-7 years, then allocate a majority of your money to domestic and international mutual funds with the balance 15-20% invested in debt.