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How to be cautious

When you're investing a large sum that is critical for your future, you'd better not try to outguess the markets

How to be cautious

Among the email that I get from Value Research Online members, there was one whose main subject was fear induced by imminent good fortune. That sounds puzzling but is actually quite normal. The only reason it's not common is that imminent good fortune is uncommon. The email-writer said that for next three years and three years only, he was going to earn a huge salary. He would obviously like to invest it well as this was a unique opportunity to build a nest egg for the future.

However, the anticipation of earning this apparently life-changing amount of money has changed his attitude to investing. Up till now, he has sensibly being doing straightforward SIPs in equity funds, but now, he instinctively feels that he must be analyse more and be more careful. Therefore, he finds himself looking at the valuations at which the market is and whether there is a bubble and whether he should wait for a correction so that valuations would come down and so on and so forth.

This is not a unique reaction. Many people think that just running SIP investments is a careless and sub-optimal way of investing, while trying to tailor and time one's investments to market movements and valuations and bubbles and oil prices and whatnot is the proper way. Unfortunately, this is tragically wrong. It's an idea perpetrated by advisors of various kind who try to sound smart by making things sound complex. A simple and straightforward approach inevitably works better than the complex one.

It's understandable that someone who is investing a larger sum than he's used to will feel a little scared and would want to make sure that nothing happens to his nest egg. However, the solution to that is to have a more conservative split of equity and debt, instead of trying to second-guess the future.