- Date : 07/10/2021
- Read: 4 mins
These golden investment rules can set you up for financial success.
Smart investing can help you meet your life goals. Whether you want to buy a house, travel abroad, save for your child’s education, or retire comfortably, the right investment strategies can make all your dreams come true. While there is no quick fix to becoming rich, some prudent investing rules can pave the way for financial freedom.
1. Start early
This first rule to become rich cannot be stressed enough. The earlier you start investing, the more time you give your money to grow and compound. Here’s a simple way of explaining this: If you start in your 20s and invest prudently, your money will make money over the years. This will ensure you have a sizeable amount to buy a house in your 40s or to retire comfortably in your 60s. For example, if you invest a modest Rs 10,000 per month at an estimated 12% annual return, your corpus will grow to Rs 23.5 lakh at the end of 10 years. Even if you stop investing and let the money compound for another 10 years, your primary investment of Rs 12 lakh will multiply 6 times over to Rs 77 lakh!
2. Practise goal-based investing
Your investments need a direction, a focus. This is imperative to build discipline and be consistent about investing. It deters you from dipping into your savings every now and then and encourages you to keep saving to meet your particular goal. For example, if your goal is to go on a beautiful European holiday in two years’ time, you need to choose an appropriate tool that will give you the returns you desire in the required time frame and invest in it consistently. If ever you feel the urge to miss investing for a month or two to go shopping or buy an expensive gadget, the goal of spending your days admiring the Alps will stop you from spending that money and keep you focused on your investment.
3. Invest as per your risk appetite
We all have different risk personalities, so it is important to understand yours before you make an investment choice. Risk appetite refers to the maximum amount of risk you are willing to take on your money to get to your investment goal. For example, if you are happy getting a 7% annualised RoI with a 10% risk to capital, you would be considered to have a low-risk appetite. Conversely, if you are open to invest in an asset that delivers 20% returns but carries a capital risk of 50%, you would have a high-risk appetite. Investing as per your risk-reward paradigm allows you to select the appropriate assets from a wide range of options, manage expectations, and plan for any contingencies that may arise. For example, hedging is one of the popular stock market strategies for F&O trading that allows investors to optimise gains without having to bear the complete loss in case of a downturn.
4. Diversify your portfolio
The centuries-old advice about not putting all your eggs in one basket is still 100% relevant and accurate today. Putting all your investment in one particular mutual fund or stock comes with high risk and high return. If that stock performs well, you can make a substantial profit, but if it tanks, you lose your hard-earned money. The best investment strategy is to diversify your portfolio into a variety of assets such as mutual funds, bonds, stocks, gold, cash, fixed deposits, and more. A carefully chosen blend of assets will withstand a variety of market conditions, provide a hedge against ups and downs, and ensure that your corpus is protected.
5. Delay gratification to accumulate wealth
The marshmallow test does not apply only to children; it can pay off really well for adults too. For the unfamiliar, an experiment was conducted in the 1970s where kids were given a sweet treat and asked to wait to eat it. They were told if they showed self-control and waited, they would be given a second treat as well. The results of the same were ground-breaking. The test showed that kids who waited went on getting better grades, higher SAT scores, were fitter and faced fewer behavioural issues than kids who ate their treat immediately. The same is the rules of wealth creation. If you delay your gratification by not spending your salary immediately, you will have money left to invest, compound, and create substantial wealth.
Being wealthy means different things to different people. Regardless of what it means to you, these rules can help you attain the degree of wealth you desire. If you are disciplined in your saving and investing strategy and follow these simple investment rules, you can accumulate enough wealth to live a comfortable life for the rest of your life. These rules will assist you in developing healthy habits that will put you on the path to financial freedom - whatever that means for you.