“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Paul Samuelson.
“Cash – in savings accounts, short-term CDs or money market deposits – is great for an emergency fund. But to fulfill a long-term investment goal like funding your retirement, consider buying stocks. The more distant your financial target, the longer inflation will gnaw at the purchasing power of your money.” Suze Orman.
Even up to a generation ago, being investment savvy was merely a smart thing to do. Now, investing wisely has become a necessity. With economies all over the world becoming increasingly unpredictable, you need to keep your money protected as well as growing. All this has to be done in an environment where investing jargon and the complexities of the stock market are completely lost on the common man. Trading in futures and options, deciding between stock and bonds, investing in art and commodities is pretty foreboding. The basics, however, remain the same and we would do well to remember them.
1. Follow the leader – Do what Warren Buffet does. If you’re completely clueless about investing, follow a leader who built a reputation around investing without stretching the rules, someone who genuinely shares his investing tactics freely. If there is such a trusted investor who shares his buys and sells in your economy or country, you might as well take advantage of that person’s wisdom.
2. Calculate your needs – Let’s say you earned ‘x’ as salary, and at the end your career you’ll end up earning ‘4x’, but you are likely to spend ‘2x’ after retirement, how do you ensure that you will have enough money when you retire? When you divide ‘2x’ over the number of months for your entire life expectancy, that will tell you how much to save every month to maintain your lifestyle to the end of your days.
3. Be regular – Start investing as early as you can, ideally from the time that you start earning. Pay yourself first – that is, take out a small amount, say 10% of your take-home salary, and invest it. A good way to do this is to set up a Systematic Investment Plan (SIP) in a couple of good equity mutual funds and ensure that the same amount is invested in these funds monthly. Rupee cost averaging and compounding will ensure that your SIPs grow up to a pretty tidy sum over the years. Increase the amount on your SIPs as your savings grow. This is possibly the most sensible way of investing. (Read about cost averaging and compounding, there are a number of sites on the internet explaining these terms and the advantages of starting a systematic investment plan).
4. Bonds vs. Stocks – Bonds will give you lower but assured returns, stocks will give you higher returns but with a greater risk. Depending on your country you should have your investments in both of these but in different ratios. However, the combined average return on both together should certainly be above the rate of inflation in your economy. For example, if stocks get you an average 8% return, bonds get you 4% and the inflation in your economy is 5%, then make sure that at least 30% or more of your investments are in stocks so that you can at least beat inflation. If you are in your 20s, invest almost all your monies in stocks. As you keep getting older, slowly start shifting your monies towards bonds. An important and sensible tip – when investing in stocks (shares), pick up a few good companies that you think will do well in the long run and buy stocks of such companies. Stay invested for the LONG term – stock options, bonus shares and dividends will ensure that your investment in good stocks grows exponentially.
5. Identify safe havens – Gold could be a safe haven investment. Art and wine are pretty good too. They also have the tendency to shoot up in value unexpectedly. They depend a lot on the economy doing well; even if the economy is doing moderately well, these categories have the tendency to grow quite fast. They’re pretty safe in the long term unless the economy crashes completely. Do a little research into future trends and figure out which mineral or commodity will remain in high demand over the next decade. If there is an opportunity to invest in a company dealing in those, go for it. However, if you are not too well versed with art, commodities and the like, keep away.
6. Stay away from Investors Regret – Let’s say you received a tip about a certain stock or even a hot artist and then your investment crashed, you’d be wary of taking a tip from that source again. This will also affect your attitude towards other tips on that kind of investment. On the other hand, let’s say you acted on the tip and came out a winner. Your attitude would swing strongly towards such risk. Both extreme are avoidable. If you lose, you’ll have the guilt of a bad decision. If you win, you’ll kick yourself for not investing more. If investment is your primary source of income then you’ll be more prone to this syndrome. Ideally it shouldn’t be. Be rational with your investments; after all, it’s your hard earned money.
The following points are unconventional thinking. Mull over them and if you come to the same conclusions as I have outlined, look at them seriously as investment opportunities.
1. Land is the source of all material wealth – No matter what economic activity you think of, it has its basis in land – whether it is the manufacturing of goods or resources that come from trees, mining etc. or the setting up of a hotel. Stocks are stored in buildings which are essentially developed land. Even teaching and software development, which don’t seem to need land directly, need space to operate in. In a highly populated and relatively poor country like India, land is need for developmental activities and for providing housing for the burgeoning population. And land is a finite resource. Even in an economy that has completely crashed, you may still be able to grow your own veggies on the land you own and get by. Therefore, if you have the money to do it, definitely look at getting some land into your investment portfolio. It is the surest possible protection for the future. However, do ensure that you buy land, a house or a flat from a very reliable source. Do a due diligence. And ensure that all the legal documents are in place; consult a good lawyer when entering into land deals.
2. Invest in your health – Obviously, you understand how this is beneficial for life. But good health is also a definite financial opportunity. We all know that our bodies will begin to deteriorate as age. Now, when your body deteriorates you will spend money on it. So it is a sure-shot expense and a big one. You could be paying in the thousands, even in lakhs if you have serious ailments. But what if this expense in the future is considerably reduced? What if you could save 50-80% of that expense? That translates into greater savings, lower stress levels, more happiness and even better health. Apart from monetary savings, good health will allow you to be productive even after your retirement years. Good health and more savings provide another invaluable benefit – it will allow you to spend more time with the people and activities that matter and do it in a satisfying way as well. Imagine the long term benefits of a daily 30-minute walk or jog and a sensible diet – you could become even richer!
There are always a number of opportunities around you and only so much time. Choose wisely. Choose in a way that you don’t feel stressed. If you’re the safe type and that makes you sleep well at night, then that’s what you should do. Don’t be bothered if someone else takes great risks and seems to be pulling them off. Choose your investment opportunities wisely and stick with them for the long run.
If I were to make a summary recommendation, this is what it would be – start investing from an early age, invest regularly, buy some land (for investment purposes or for living), stay healthy and stay invested till the time that you have to live off your savings.