Investing starts with saving.
Like savings, investing is also a habit that is developed gradually.
But
We avoid investing because of inherent risk attached to it.
Investment is a process of putting your saved money into some financial product or project to expect some return in the future.
And
The future cannot be predicted accurately.
The less risky investments such as government bonds, post office schemes, FD, etc provide fixed and low return.
On the contrary,
The products like stocks, mutual funds, gold, and real estate provide attractive returns but the risk is more.
Not everyone can digest the volatility in their prices and leave in between before reaping the real benefits.
The volatility in the prices and the unstable returns that make an investment a tough nut to crack.
Also, the innumerable investment products in the market are enough to scare and confuse us.
Many questions such as:
- Where to invest?
- When and how long to invest?
- Look for an advisor or do-it-yourself
- Buy one product or many
- How much amount should one start with?
Further create problems in investing.
In addition, you will find people making stories of making easy money within short time.
Some say invest in stock market to get sure shot return while others say invest in real-estate to get real returns.
There is no one sure way of getting return from your investment.
One investment style that worked to others may not work for you.
Amidst all the noise, I’m going to tell you the steps that you need to follow while investing in any instruments to avoid pitfalls.
1. Planning
- The first step is planning based on your goal.
And this goal could be:
- Fund for your retirement
- Money for the higher education of your children
- Marriage
- Buying a house
Thereafter you need to decide how much money you want in future to achieve that goal.
For example, your goal is to have Rs. 1 crore when you retire.
You have 20 years left for your retirement.
You can save Rs. 10,000 per month.
You can see that you need at least 12.3% annual return to accomplish your financial goal.
This is achievable.
Keep a margin of +-10%. If you get even 90 lakhs, consider that you have achieved your goal.
And
Anything above 1 crore is your bonus.
2. Strategy
Next step is to look for the products that can help you in achieving the goal.
These products could be:
- Stocks
- Mutual Funds
- Gold
- Real estate
- Debt Bonds
- Bank or Post office Products
Select at least 2 or 3 products to diversify the risk.
For example, you selected mutual fund with an annual average return of 15% and Debt Bonds 8%.
You invested equal amount; the weighted average comes out: (15%+8%)/2 = 11.5%
That is near to your goal.
It is fine.
You cannot expect everything perfect and accurate in investing.
3. Learn the basics
After selecting the instruments for your investment, make sure to get their basics clear.
Invest at least 2 months to understand the terms, working and cost involved while investing in these instruments.
4. Start small
Although, you have got the basics clear, there is always the element of risk associated with the investing.
Therefore, it is advised to take small steps and start small.
And stick to this habit.
You can always increase the amount later on.
And
With time you will also understand more and become comfortable with the products.
5. Don’t borrow
Never borrow to accomplish your financial goal as this could be financially dangerous.
You will pay fixed amount every month as an obligation. But your investment never grows in a uniform fashion.
You see dips and ups before realizing your financial goal.
6. Stick to your goal
There will be times when you see the investment value may coming down than your initial investment.
Remember to complete the step thoroughly.
This will give you confidence to keep going during uncertain times.
You purchased home for Rs. 45,00,000 for the investment expecting it to get around 1 crore in in 20 years.
Due to the current Pandemic, the property prices slashed and your investment came down below your cost.
You made every due diligence.
- Location
- Builder
- Future prospects
And the property performed well in these aspects.
Don’t dispose the property in hurry expecting the prices to slash further
Understand that this pandemic is a global phenomenon and with time it will pass with time.
Similar situation may come in future don’t fear and stick to your plan and strategy.
You will soon bear the fruits.
7. Invest for longer period
The term investment is associated with the longer period. The longer you invest, the better your returns get due to the effect of compounding.
Let me make you understand with this example:
I am taking the graph of the above example, notice that the effect of compounding becomes prominent in the later years of the investment.
Most people leave in between, they don’t enjoy full benefits.
8. Avoid herd mentality
- You will see people investing in hurry because other people are investing or you heard that this product will make you rich soon.
Similarly, people start selling in panic when negative news hit the market.
This is a common mistake people do and they repent later.
Never put your money in any instrument with doing your research and due diligence.
Stay calm and remain invested in your product.
9. Be patient and don’t aim for perfection
It is okay to get the second or the third best
Your investment will take time
Return from your strategy. You did everything to make your investment a success.
Conclusion
Although there is no perfect style of investing, it doesn’t mean that you should not start.
Follow the above steps to avoid any pitfall and remember to start small and make it a habit.
Investing is a long process.
Once you are into investing, you will learn more about it while doing yourself.
You cannot get everything from anyone.
You need to do it yourself.
All the best for your investing.
Note: The investment is subject to the market risk and the past performance may not be the indicative of the future performance.
This article is for information and education purpose. Please take professional advice before taking any investment decision.