Teachers’ Day 2024: One of the key objectives of investing is to achieve short-term and long-term financial goals which include, but are not limited to, buying a house, paying for children’s education and saving for retirement.
Investing requires unconditional discipline, razor-sharp consistency and oodles of patience. At the outset, however, one is meant to learn the ropes of investing.
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One should know, for example, the key difference between savings and investment, multiple investing options which one can choose from, how to achieve financial goals and how to do asset rebalancing.
This teachers’ day 2024, let us try to share some of the key principles of investing with our younger friends who are either interested or keen to understand the world of investing.
Although knowledge knows no bounds, there are eight key fundamental principles which all investors should know.
Share these money lessons with your younger ones:
1. Unspent income becomes wealth: The income you spend does not make you wealthy. The income which you don’t spend i.e., savings — when invested in financial instruments — helps you become wealthy over a period of time.
A. Savings: The money left after covering your expenses is known as saving, which can be further used to buy securities or other financial or non-financial assets.
B. Investment: Once savings are deployed to buy some assets – financial or physical – they turn into an investment. Different categories of assets are listed below.
2. Equity is for the long term: When you invest in equity, you should do it for the long term. This means you should overlook the daily volatility that takes place in the stock market, thus rendering some investors euphoric, while others finicky.
When you are supposed to invest for a short period of time and do not want to risk your capital, you are recommended to invest in debt instruments which are described below.
3. Debt instruments: When you are looking for assured returns, the safest investment instruments are debt which include fixed deposits (FDs), sovereign bonds and corporate debt, among others.
Wealth advisors often assert that investors should invest in debt instruments when you have a time horizon of shorter than three years. Those who do not want to invest a lot of money in debt instruments can also invest in precious metals such as gold and silver.
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4. Precious metals: Besides debt instruments, investors can invest in gold and silver to hedge against inflation and market volatility. The wealth advisors often recommend that investors should invest in the precious metals when they are not looking for exceptionally high returns.
5. Asset allocation: Investing across asset classes such as equity, debt, precious metals and even real estate helps investors create a portfolio which should have a predetermined allocation to different asset classes.
For instance, it is recommended to allocate the largest proportion to equity (say 60 percent), a slightly smaller portion to debt instruments (say 30 percent) while the remainder of portfolio (say 10 per cent) to precious metals such as gold and silver.
6. Asset rebalancing: When market volatility takes place, it is vital to rebalance the portfolio in order to bring it back to the original ratio by selling or buying some of the assets and redeploying some of the proceeds.
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For instance, when the equity ratio jumps from 60 percent to 70 percent as a result of the bull run, then it is vital to sell the extra 10 percent and redeploy the proceeds in debt instruments to rebalance the portfolio.
7. Financial goals: Earning healthy return on assets is not the sole goal of investors. They should, ideally, be pursuing financial goals. These could be short term, medium term or long-term goals.
For instance, buying a car or jewellery item can be a short-term goal, while saving for the children’s education could be a medium-term goal, while saving for retirement is a long-term financial goal.
Any investing activity by retail investors should ideally be driven by one or more of such financial goals.
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8. Risky assets: Although some investors have started to invest in cryptocurrencies and similarly riskier assets in order to earn higher income, it is advisable to refrain from such assets for the risk they carry. And even if you are too fascinated by them, allocate a smaller portion to them so that losses in this investment do not shake your portfolio in case of losses.
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