Investing seems to rank rather low on the list of priorities for the generation of today. Unlike the earlier generations who saved money today for a better tomorrow youngsters today are focused more on spending money rather than saving. One wonders why. Is it because we live in a world so focused on the here and now, that planning for the distant future seems like a nonessential task? Or is it the innumerable choices between buying individual stocks and the myriad of different mutual funds is so confusing and intimidating that they rather not do it alt all? Whatever be the reason, the fact remains that saving early on can help build a large corpus to see through the golden years of life. Investing is the best way to secure your future.
In the normal course there are two ways to earn income; one is to exchange your labor for money and the other is to have your money earn money for you. The ability to exchange labor for money decreases as we grow old and at that juncture having an investment corpus that can earn money will ease the burden to a great extent. Hence it is important that every youngster feels responsible enough to plan for that inevitable event now as it is the first step towards self reliance.
Time is the most powerful asset when it comes to investing. Many young people have a short term and erratic approach to investing. They feel that investing is all about parking your surplus funds till the next time you need it. Investing cannot be taken lightly. It is a long-term process that requires a consistent and systematic approach. Investing should be thought about in terms of years or even tens of years rather than in months. Returns get compounded if invested corpus remains untouched for years.
For example, if an investor had subscribed to 100 shares in Infosys IPO at Rs.9500 the value of this investment would have been approximately Rs.2.6 crores today. The majority of successful investors have realized that investing consistently over the long-term gets the best returns. So there is an urgent need to change youngsters’ perspective towards investing.
Focus on inflation adjusted returns:
Inflation is a silent killer that quietly eats into your returns. Surprisingly many investors are unaware the impact of inflation on their portfolio. Money kept in a “savings” account is earning interest at rates that don’t even keep pace with inflation. For example if the inflation is 11 percent and the return on investment is 7 percent, then your investment portfolio is eroded by 4 percent every year; and instead of making money you are losing money every year. As a young investor you have the ability to increase the allocation to riskier assets like equities to get those extra returns to beat inflation. You have to construct a portfolio to include all types of assets risky and otherwise depending on your risk bearing capacity.
All assets come with their own risk return mapping. Understanding these risks is the first step toward minimizing them. As you learn more about each asset and its risk profile you will be in a position to decide how much risk you want to take and conversely how much return you need to make. With adequate knowledge it is possible to make 10-15 percent annual return on your investment with minimal risk.
To begin your investment journey you need to know a few basics tenets of investing. How returns are generated, how an asset becomes risky, how you can use diversification to mitigate risks are some of the fundamentals you should know before you start investing. For the average person, investing especially in stocks can be a mystery. Terms like P/E ratio ROCE and PAT can be a bit confusing to say the least, but in reality, about as simple to understand as basic arithmetic. The philosophy behind the analyzing company’s financials is to the judge the ability of the company to generate superlative returns. Finally it is a company’s performance that dictates its stock prices.
Information is the key to investment success as you begin this journey towards self-reliance remember.