Investing is not just about trying to grow your savings, aggressively. It is a prolonged commitment to grow your wealth, in line with your near-term and long-term financial goals. This systematic process involves taking calculated risks to create long-term sustainable wealth. And is effectively built on these four pillars:
Pillar#1: Define your financial goals: Identify your future needs and wants
Why am I investing?
Where do I see myself 20 years from now?
Every investor must ask himself this before starting the process of investing. As the answer to this defines every investment move.
Unfortunately, it is also a question you might not have an answer to, as it involves making some important life decisions in an uncertain future. Most of us don’t know what next month will look like, how can we possibly plan for the future, right?
Well, if you are lost there is no harm in seeking help or getting inspired by others.
Some of the most common financial goals people have are:
Short-term goals: a luxury vacation, buying a fancy car
Medium-term goals: a down payment on a house, home repairs
Long-term goals: Retirement, child’s education etc.
The first step towards setting financial goals is to assess your financial situation. To know what you have as your worth, today will help define what you might need tomorrow. It will also alert you to the adjustments your life needs, ranging from savings to spending to even earning more.
But how does setting goals help?
The closer you are to financial goals, time-wise, the more protection you want for your principal. The more time you have, to achieve your goal, the more you can afford to take on risk.
There is a time-related sweet spot for every type of investment, be it stocks, bonds, or bank savings account. And a hard-to-ignore relationship between risk and how quickly you need to access your money. So your goals and its timeline define your choice of investments.
Pillar#2: Develop an effective investment strategy: Know what you are doing
''Risk comes from not knowing what you are doing.''
All investments carry some inherent risk, along with the potential for asset growth. As an investor, it is your job to understand all the risks and return potential they carry and prepare an effective investment strategy;
a systematic approach to investing that does not jeopardize your savings or your investment goals.
The primary job of an investment strategy is to reduce stress by helping you ride through volatile times. An effective investment strategy works in all scenarios, reflecting your financial goals at all times.
The fundamental elements of an effective investment strategy are:
the level of risk you are comfortable with,
the kind of growth you need and;
your time horizon for investments
All of these are defined by your financial goals.
There will always be some inherent risk when investing, so stick to making safer investing decisions. The key is to maximise your returns while minimising your risks.
Pillar#3: Keep your emotions at bay: Don’t let the market sentiments drive your investment decisions
History tells us that we must never let our emotions drive our investment decisions. As markets fall, investors tend to panic. Which, honestly, is quite normal. But what follows is a flurry of rash decisions that can be detrimental to creating long-term wealth.
If you think about it, it makes perfect sense. As if you panic (out of fear) and sell every time the markets fall, chances are you will never create wealth over the long term. Similarly, if your greed prompts you to invest as the markets rise, you might not profit.
Now, imagine panicking and exiting the stock markets entirely during the 2008 subprime crisis or the more recent Covid-19 crash. You would have missed out on what is perhaps, some of the best opportunities to grab good companies at deep discounts.
A long-term investor must accept that volatility is a part of investments. Business cycles are a reality, and extraordinary events will give rise to market volatility.
All you can do is stick to your investment strategy; while keeping a firm check on your investments. But you can only accomplish that by fighting any emotions that may get in the way.
Pillar#4: Start early and keep at it: Investing small amounts of savings regularly can add up to a lot over time
Saving as a concept was never really introduced or discussed as we were growing up. Most of us learnt it the hard way. Some were introduced to it by their books while others from their experiences, more often as a regret.
As a result, something that should have been a force of habit came to us much later in life.
But even after learning about it, we did not take the right steps, as several myths were floating around to misguide us even further.
A top demotivator to saving and investing is the common belief that you need a truckload of savings to start. Unfortunately, this is a common myth which puts you right onto the slow train to good financial health. As the earlier you start as an investor, the better off you will be.
Most successful investors started saving and investing at an early age, contributing small amounts.
This habit helped them recognise the value of saving and investing early in life. They realised that if you are unable to save early in life; you will have to put away a lot more later, to make up for the lost time. So a better strategy is to start early, no matter how young you are or how little you can earn and save.
Better understood with an example:
Scenario 1: A couple decides to invest Rs1,000 for their daughter since her birth.
Scenario 2: Arun invests (once he has earned enough) at the age of 45 years and puts away Rs 40,000 per month towards retirement.
Scenario 3: Anita decides to invest Rs 5,000 after her very first job for 40 years.
Savings per month
Power of compounding
Scenario 1 – Parents
Scenario 2 – Arun
Scenario 3 - Anita
Even though Anita saved and invested a lot less (less than half) than Arun, she had an edge as she started investing early. The same applies to the parents who started investing small amounts from the day of their daughters birth. And so saving and investing early with tiny sums, enabled them to save a lot more than Arun.
Never let your level of earnings or savings demotivate you from saving. As these examples depict; even the tiny amounts of contributions made at regular intervals can add up to a lot, with the power of compounding.