Friday, January 22, 2010

Investment Philosophy-Learnings from the Financial Crisis of 2008

1. At least 15 % of your net worth should be liquid, i.e. cash or bank deposits or low risk treasury bonds. This gives you opportunity to take advantage of market distortions and interesting deals when cash is king.
2. Sell in good news and buy in bad news.
3. Don't leverage for investments in financial instruments.
4. Total leverage should not be more than 0.25:1 leaving out the occupied residential property.
5. Avoid long dated bonds as you carry high degree of liquidity as also market risk.
6. In real estate investment, focus on income generating assets only.
7. Follow the policy of asset allocation: how much money you should be putting in risk assets like real estate and equity.
8. Check the stability of your cash flow. Predict the range of high, average and low by using probability factors.
9.Set aside six months' of household expenses including mortgage payments in a separate bank account outside the minimum 15 % of liquid assets.
10. In equity,once you achieve the profit target, sell at least 50% of the holding.
11. Always have at least 25 % to 50 % of your equity holding giving you a good dividend yield.
12. Constantly watch for the sectors going out of favour and ensure exit before re-ratings.

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