Updated on: June 8, 2020 ; Investments
What is the objective of any investment?
Investments can be of many different types. Let’s look at a few examples to understand what these types can be:
People invest in their children’s education for a brighter future; on their diet and healthy practices for better health; in upskilling themselves for better job opportunities, etc. This list can go on and on.
And then people also invest in financial products. This will be the primary focus of this article.
So what is the common goal of all these different kinds of investment?
Answer: To ensure a better and more secure future.
The aim of your financial investments is – the growth of your financial assets and savings.
Have to set your financial goals?
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We already listed the primary objective of your financial investments. But this is a very broad definition. If you want to have success with your investments, you need to go a bit deeper.
First, you need to know what are you saving for. Set your specific goals. It could be to buy your dream house, plan your retirement, fund your children’s education, go on that long-planned vacation and the list goes on.
Once you have these specific goals set, you need to set an approximate monetary value to each of these goals.
What next? Devise a financial strategy to achieve these goals. Let’s look at how to go about this in the following sections.
How to plan your financial strategy?
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The success of any investment depends on the combination of a lot of factors. You need to understand these in-depth before you designing your strategy. Unfortunately, there is no crash course or syllabus for this. But don’t worry, there are very simple ways to reach there, provided you are ready to spend some of your effort in learning them.
You need to spend your time doing a lot of learning. The good news is that you have already started 😊. I will be writing more on these topics, so keep reading more. There are many resources available on the web to build up your arsenal, make judicious use of them.
While, you may seek guidance from others you trust, but finally you alone will be responsible for your financial strategy. You will bear the fruits of your actions.
What works for others might not work for you, as each individual is different, has different needs, personalities, and circumstances. There will be several occasions when you will be tempted to blindly follow someone else’s strategy. But without knowing all the details following some else blindly could prove to be very disastrous. More on this sometime later.
So where do we start? We will start by briefly touching upon the essential elements of any investment. It would not be possible to explain in all of them in detail. I will be writing about them in detail in the following articles.
Essential elements of a successful investment strategy
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Savings: Like every life starts from a single cell, the starting point for any investment is the initial invested amount. This amount will come from your savings. For a sound strategy, you will have to keep investing at regular intervals. You need to build a steady corpus of funds for your investments. Develop the habit of saving. Here is a famous quote from the legendary Warren Buffett.
“Do not save what is left after spending; instead spend what is left after saving.”
By Warren Buffett
Investment Vehicles: There are many investment choices available to you today. They could be overwhelming at times. You have to understand the different options before you start investing in them.
Citing a few examples here: fixed deposits, pension schemes, bonds, mutual funds, direct equity in stock markets, gold, foreign equity, private equity, etc. Don’t get worried if you don’t understand them. You don’t need to master all of them. We will discuss these in great detail some other day.
Each investment vehicle has its own distinctive traits. You need to understand how they work, what are their expected growth rates, and what are the underlying risks associated with each of them?
Blinded by the spectacular past performance of some of these vehicles, people often tend to fall into the trap of ignoring these risks,. Beware of such traps. Even seasonal players are prone to such mistakes.
Time: This is the most under-appreciated aspect of investing and the most difficult to follow too. Please note that investing is a long term commitment. It can be a very boring process as well. Just like a seed does not grow into a strong and a giant tree overnight, investments also do not grow overnight. They take their own time to grow.
Some of you might be thinking, “That’s not entirely true because I know someone who just got rich overnight because he had done some cool financial investment”. Please do not fall prey to such stories. Ask yourself the following “Do I know” questions before believing in such stories.
- “The entire truth behind the story”?
- “The history of investments made and the learning this ‘someone’ has gathered over years”?
- “If it was truly an investment or speculation”?
- “The vehicle that was used to invest”?
- “The effort and time spent on creating the corpus”?
- “The underlying risks associated with it”?
- “How would I react if the strategy didn’t work out”?
- “If there was a backup plan, in case things didn’t work out as planned”?
To put things in perspective, think of investing as a cricket test match against a formidable team. A test match is a long drawn contest. You have to face different, uncertain, and unexpected situations. Different situations need different treatments. You make good use of the easy ones and strongly defend the tough ones. Only the ones with skill, patience, consistency, and endurance prevail.
You might have a few odd overs in between with splashes of 4’s and 6’s but they don’t represent the entire innings. To win the match you have to play a steady game and stick around for long.
Similarly, you have to stay invested for long for any successful investment. You might be lucky to see some quick initial gains, but that would be just by chance and be a very small part of the overall wealth appreciation. The real benefits come when you stay invested for a very long period, that is the power of compounding. It creates wonders for your investment as you stay invested longer.
Human behaviour: This is another underrated, yet critical component of investing. Your appetite for risk should determine your choice of investment. Your level of conviction, patience, and perseverance will determine how well you weather the occasional financial storm.
There will be many testing times in this journey. How you react during such periods will be determined by your behaviour. You will have to maintain a very stable mindset to know the difference between right and wrong.
Thus, it very important to understand yourself first and know how would you respond to any adverse conditions. Remember, the pain of loss is much more than the joy of equal gain.
“losses loom larger than gains.”
by Kahneman & Tversky
Conclusion
First, set your specific financial goals. Define a strategy to achieve them. Your strategy is unique to you. Do not blindly imitate others. Know yourself and imagine how would you react under stressful circumstances. Take out time to research more on all the essential components. Do not rush.
The path to success if long, boring, and enduring. Check out later for dedicated posts on specific topics. Till then, Happy Investing!!!