I am writing this post from Kuwait, where I have come on an assignment yesterday. It is probably a good time to stay away a little from our markets anyway !! On a more serious note, I have been inundated by messages from readers over the last 2 weeks – everyone wants to know where the markets are going and how they can protect their investments. This is easy to answer – when you have chosen to get on a ride you have to last the course, you cannot opt out in the middle. Problem in life usually is that we all like the good bits and get worried at the first signs of trouble.
If you read my blog posts carefully, you will probably find answers to most of your questions. However, for the benefit of the newer readers and also as a good summary, I wanted to put this simple investment commandments in place:-
- Plan your life goals first, before you put a financial dimension to these.
- Follow the simple 1-2-3 rule of investment. Have 1 time line for all your goals, 2 asset classes in Debt and Equity and 3 Portfolios in Debt, Mutual Funds and Stocks. You can allocate based on your comfort level.
- Over long periods, if your portfolio needs growth then you must be in Equity. However, do not underestimate the value of debt as a solid foundation to any portfolio. This will be important to avoid selling equity at the wrong time.
- Always try to maximize your earning, that is the best way to increase investments. Spend adequately on things that are important to you, remember that you only live once.
- Be sparing with taking loans, especially the ones for consumption purposes. Remember always that if you cannot afford something out of your present income then you probably cannot afford it.
- Even home loans are really not “good” loans. You may need to take a home loan for buying one but try and pay off the loan early if possible to avoid the high interest burden.
- The compounding logic that most financial planners talk about really works for debt and not for equity. Therefore, make sure you invest in debt early and let it grow to the maximum extent possible over the longest possible term.
- Equities also grow in the long term but this growth is really non-linear. Therefore, you will get chances to invest several times, you need to be on the look out for such opportunities.
- Everyone will tell you not to try and time the market but in reality, you need to always try to buy and sell at the best possible instant. You will never get it completely accurate but this is important.
- Most of the traditional tools for calculating how much you will need in retirement are not going to give you the true picture. Do this exercise yourself and base it on the kind of life you want to lead in retirement.
- Be conservative in your growth estimates for investments, 8 % for debt and 12 % for equity should be the maximum.
- When you are planning for financial independence or retirement, make sure that your passive income stream is tax efficient. Do not chase 1-2 % higher return at the cost of paying taxes, it is not worth it.
- Any investment plan that depends on fulfilling the goals necessarily through equity redemption is a bad one.
- Similarly withdrawal in retirement by equity redemption can work at times, but is fraught with risks.
I hope you will find these to be useful pointers in your financial journey. Always remember that any advise which makes investment sound complicated or intensely mathematical is probably the wrong one. In life as well as in personal finance and investments, simplicity is not only a desirable trait but also the most effective one.
I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.
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