I often come across people who are afraid to invest. Either they find the process too complicated or don't know how or where to begin? Which concerns me. As truth be told, investing is simple. If done well, it is perhaps one of the most effective ways to create long-term wealth.
All it requires is a simple approach and patience at your end to allow your money to grow.
But before we begin, ensure you have a few things in place
· An emergency fund – money kept aside to meet your living expenses. So if you suddenly find yourself without your monthly source of income or any unforeseen expenses. A good thumb rule is to keep aside 6-9 months of living expenses in a liquid, safe and accessible investment instrument like a bank's fixed deposit.
· A debt-free status – As debt tends to impede savings let alone investing. So try and pay off all your credit card debt or any other loans you may have. Aim to minimise interest payments on borrowed money.
· Adequate Insurance – ensure you and your family have adequate insurance coverage. Choose a simple Mediclaim policy that doesn't offer to invest your money. Further, check if your preferred (or closest) hospital accepts your insurance provider. As no matter how good a policy you have, it will be of no use if your hospital doesn't take it.
These are crucial to investing successfully. As medical expenses, ongoing debts or any substantial unexpected expenditure can quickly eat into your savings and derail all your investment plans.
Why am I investing? Determining the reason for investing is crucial
Start by identifying the reason you want to invest, often referred to as financial goals in the investment world. Ask yourself: what is my ultimate goal? When do I want to achieve it?
If you are new to investing there is a good chance you are not clear on your financial goals. But you can take inspiration from others. Buying a home, saving for child's education, saving for retirement etc. are some of the most common financial goals people have.
Identifying financial goals is essential as that alone defines all other crucial aspects of investing. These include:
You're risk-return appetite. How much risk are you willing to undertake? What kind of returns do you expect?
How much do you need to invest?
The investment world offers various kinds of investment products which are not suitable for everyone. And your financial goals will help you chose an investment product that will suit you best.
Where should I invest? Your choice of investments must reflect your goals at all times.
You have several options, which can be quite confusing. Although stocks offer high returns but are highly volatile and are considered risky, fixed deposits and other bonds carry less risk but offer low returns.
But worry not as this is where your financial goals and their timelines come in handy. The longer your investment time horizon, the stronger your aversion to risk is. Better understood with an example:
A man looking to buy a house in 5 years cannot take high risks. He must invest more in 'safe' instruments like Fixed Deposits and bonds. Whereas someone looking to fund his child's education after 16 years can take more risk. He can expose more of his portfolio to stocks. Sure, there will be ups and downs in the stock market, but investing for the long-term means he will have decades to ride them out — and decades for his money to grow.
Assuming you are 25 years of age:
Time period for achieving goal
More of Fixed deposits and bonds
Largely Equity (Stocks)
Medium to Low
More of Equity
The key is to achieve the right asset mix, by not just choosing the right investments but an assortment of investments that work well with each other.
Even when you are deciding to choose between individual stocks or mutual fund ask yourself this. Do I have the time, knowledge and desire to invest in stocks? If the answer is no, you can always opt for mutual funds.
How much should I invest? The sooner you start, the better off you will be.
As mentioned before, this depends entirely on your investment goals and when you need to reach them. Everything revolves around it.
One of the most common financial goals is saving for retirement. And for that, a general rule of thumb is to invest 10%-15% of your income each year for retirement.
For your other financial goals, consider your time horizon and the amount you need. Then work backwards to break that amount down into monthly or weekly investments.
The key is to start early, preferably at a young age, even without a financial goal in mind. You can contribute small amounts, whatever you can save. You'd be surprised to see how quickly that money can grow into a nest egg for the future.
Choose an investment approach
Once you have identified your financial goals choosing an investment approach is simple. You can take the help of a financial advisor, consider an online Robo-advisors or do it yourself.
While opting for a financial planner sounds simplest, keep in mind that they tend to charge you a lot, eating away at your returns.
So if you can find the time and energy to invest for yourself, there are several highly-effective online tools available these days, facilitating the process. They can help you and guide you well. They can choose the appropriate mix of investments that reflect your goals.
Open and maintain a separate investment account
Saving for long-term goals can be difficult. Especially when you want to buy to your dream car, and you see all that money lying in your account. So to avoid digging into your savings and subdue all temptation, try to maintain a separate investment account for all your long-term financial goals. It is a proven method known to be helpful.
Even when you sign up for a new investment account, set up automated transfers. So your monthly savings can directly go into that account. On the off chance, you're still not sure how much to save, budget to save as much as you can and set up automated transfers on your payday, so you never miss a contribution.
Keep at it and review your portfolio
Investing is a continuous process. As even after you have invested, you need to monitor and evaluate your investment portfolio periodically, to ensure that it continues to reflect your long-term financial goals.
Your financial goals evolve as you grow, owing to a new job, marriage, children etc. So to ensure that your portfolio reflects them, you might have to make some adjustments periodically.
Whatever approach you choose, start investing today. Go ahead and open your brokerage account now. Move your money out of the savings account so it can work for you. You'll be better off investing now rather than leaving your money to languish in a low-interest savings account, or worse spending it all.