“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.
Let’s face it – most of us are going to end up in a job. Salary in, salary out. Year after year. Sure, some of us will get really high paying jobs or will land a big inheritance; most of us, on the other hand – like yours truly – will have to make do with salaries that are just about adequate to meet our wants. Moreover, we will have to contend with scenarios where we are without a job (God, I got fired!), where we have ballooning expenses (marriage and kids aren’t cheap, kiddo) and, finally, the time when we have to retire. The smarter ones amongst us would do what all of us should be doing – save and invest for all contingencies.
Investments are the foundations on which you plan your future. You need to invest in your future even if it means cutting back a bit on your expenses in the present. Investing wisely will ensure that you have sufficient monies to meet your future needs and contingencies.
So let’s take a look at how to invest wisely:
Nothing is ever achieved without proper planning. Make a list of all the possible big ticket expenses that you would have to incur in the future. The list should have everything from maintaining your current life style, buying a house or apartment, higher education of your children, the marriage of your children and, finally, the corpus that you would require after retirement.
Most of you would balk at the prospect of planning 30-40 years into the future. If you are a bit weak on maths, as I am, take the help of a friend who is good with numbers. Or look for some online resources (there are many). Or, better still, hire a financial advisor. The important thing to do is to make a rough plan and to look at an appropriate inflation rate that will change the future numbers as compared with the present. If you are just not prepared to do full-fledged planning of your future, delay it by a year or two; but don’t let the planning scare you into not doing anything at all.
Pay Yourself First
Now what the hell does that mean? Simply put, start saving from your first salary even if it is 5-10% of your take-home salary. It was Warren Buffett who had said, “Do not save what is left after spending; instead, spend after you save/invest.” Now this may seem difficult – nay, impossible – to do, mainly because your initial salary may barely cover your expenses. I accept that for some, saving from an early date may just not be possible; however, for the rest, it is possible. It will be difficult at first but with time and discipline, it will become a habit. A habit that will pay off handsomely in the future.
You need to categorise the things that you have to spend on (the essentials) and the things you want to spend on (the frivolous). It’s okay to not buy a car if you already have two personal loans running even if there has been a recent hike in your salary. Even on the essentials, look for the cheaper options or for money saving deals.
Once you have made it to the saving stage, invest your savings smartly. Never leave your savings idle; inflation will eat into it. So you need to plan towards investing your saved funds.
Let’s see how to invest.
Diversification is the way to go
I am sure we have all heard the saying about not putting all our eggs in one basket. That’s correct but with a caveat. Let’s cover the caveat first – if you are young and need monies only in the long run, blindly invest in equities. If you don’t have the knowledge and the time to study shares of individual companies, invest in equity mutual funds. Mutual funds invest in different financial instruments and are handled by experts. There are a number of websites (www.valueresearchonline.com, for example) that rate Indian mutual funds; you can choose the five-star or four-star funds as ranked by these sites.
Perhaps the best way to invest is via a Systematic Investment Plan (SIP). A Systematic Investment Plan is a vehicle offered by mutual funds to help investors save regularly. It is just like a recurring deposit with the post office or bank where you put in a small amount every month, except the amount is invested in a mutual fund. A SIP allows an investment in the stock market without trying to second-guess its movements. This is known as rupee cost averaging.
Another great investment is real estate. If you don’t have your own house or flat, buying one is important. But even if you have your own dwelling, investing in real estate can give you excellent returns. Invest in real estate at an early age and use your savings to pay off the interest on the capital that you would have borrowed from a bank to invest in your property.
If you are on the wrong side of forty, it makes sense to diversify your savings into different kind of investments so that if one plan is not giving you the requisite returns within a particular time frame, others are. In diversifying, invest a certain portion in equities (or equity mutual funds), some in bonds (or bond funds) and, may be, some in gold (or gold funds). You should also look at some investments in insurance. Don’t put a big sum of money on any one stock or mutual fund; you can diversify here as well by buying some stocks of blue chip companies and some of mid-cap and small cap companies. Proper diversification will assist you in growing your funds and in spreading your risk across different financial instruments. And one word of caution – whatever you do, do not speculate. Leave that to the experts (or the fools).
Financial Advisory is required
If all that was outlined in the previous second sounded like Greek to you, talk to some knowledgeable friends or, if necessary, with a financial advisor. You may need the services of a financial advisor because that person knows the investing business and will help you create a plan that meets your short term and long term objectives.
Share your financial goals with your financial advisor and let him come out with a sensible plan. However, even if you trust your financial advisor, check out his recommendations with some family members or friends – not all financial advisors are totally kosher.
Evaluation is also important
Take out time; sit with your financial advisor from time to time to evaluate your portfolio. You will find that some of your investments are giving outstanding returns, others not so. Weed out some of your dud investments even if you have made a loss on them. Discuss alternate avenues to re-invest your money. Only by consistently checking and balancing your portfolio, will you able to achieve the financial goals that you have set for yourself. But do not overdo the evaluation bit. Do it once a year and only divest from those investments that are not likely to do well in the quasi-long run. If you have made great returns on some investments, you may want to book your profits in a safer option so that you don’t lose the gains in a topsy-turvy market.
I have outlined some basic ideas to help you invest wisely. However, you will do well to read a few good books on investing. But even as you are investing your savings, you need to remember that you future will only become better if you also invest quality time on your family and your work! Invest in education as well as that will help you in growing in life and achieving success. The more happy and successful you become, the more monies you are likely to earn. Enjoy some of that but never forget that a handsome portion of that must go into investments!