Sometimes I wonder , If I could go back in time, what would I do differently and make life more meaningful. I am sure many of you would be thinking about this ,specially after the exams. 'What would have I done differently?' But then we cannot go back in time .At best we can make use of the present to make the future more beautiful. Since exams are over now and you have ample time in hand, I thought of writing an article which can help you start the thinking process.
What would have I done differently If I had an option to go back in time….I would have definitely started financial planning and investment at a much early stage. Please do not waste your time by playing the game which most of the students play - 'Wait and watch Policy'. Most have this mind set that we will decide the future course of action basis the result. And they get into the relaxation mode where in the mind convinces you that you deserve a break , and by the time you know, result day would be approaching in no time. Time and tide stops for no one. So please do not get into this zone. Having said this, there is no denying the fact that we should balance life with hard work and enjoyment but for a student life at this stage, the exam is just a small battle, the war is yet to be won , so please do not give your self this liberty to get into too much relaxation mode.
It is an absolute time waster to focus on things which are not in our control. If you are having an endless discussions with your friends about passing percentage or if the checking will be lenient then please stop doing this. Focus on things which will make you better equipped to tackle the challenges that life will throw at you. If you are under stress at this stage of life, trust me from here on , life becomes even more challenging. Real life starts after clearing the exams.
Now let's begin by looking at some common questions and misconceptions. I will try and answer it for you to the best of my knowledge and experience.
Question # 1: 'I do not have funds to start investment' Or 'I will start investing once I start earning'
Solution - You can start a simple SIP with Rs.1000 per month . In a year you would be investing Rs.12000, which is a nominal amount and in 10 years, it would become Rs.Rs.232,339 at a conservative 12%. Remember the power of compounding. The earlier you start, better chances of creating wealth . Focus on wealth creation rather than just profit maximization. You can always increase the SIP amount once you start earning full fledged. More than the money, it will give you the momentum of starting at an early age and inculcate the financial discipline of investing.
Question # 2: 'I do not have adequate knowledge about investing.' Or 'I can do better only if someone teaches me from scratch'
It is true that at this stage you are learning about nity-gritty of finances but then this is also the right time to get the practical exposure of what you have studied . Interpreting Financial Statements, financial ratios, gauging through annual reports will only strengthen your learning. Initially it may be a boring activity but then as you progress and learn the knack of scanning through financials, it would be great fun . I would always rate learning above earning. Reading good books would always help you accumulate knowledge and experience is the best teacher.
Question #3: 'I am too young' or 'I have ample time to start thinking about investments'
Warren Buffet had once remarked he regrets that he started investing late in life and mind you he started at the age of 11. Nothing beats the power of compounding. Earlier you start better it is. Break your life into chunks of 5 years and set long term goals for yourself . Financial Planning should start early so that you can leverage on the time you have in hand because by the time you will know, it will just fly away. So please do not wait for a perfect timing, make your timing perfect.
Myth#1: 'Share Market is gambling'
If you buy and sell just on basis of someone else's tip without doing the hardwork of researching on your own, then you are just wishing that the trade rewards you. Be an investor and not a speculator. There are 5000+ stocks listed on BSE , why do you want to catch a falling life and invest n stocks of companies which are in shambles. Invest in companies with good fundamentals and quality management. Qualitative factors are equally important as Quantitative factors. If you go to buy apples and you see there are two baskets - one with rotten apples and the other one with fresh apples. Which one would you buy ?
Any sane, logical person would buy fresh apples even if the rotten ones are being sold at cheaper price. Remember, price is what you pay , value is what you get.
Myth#2: 'Those trading terminals and screens are too complex for me'
Most of the students think buying and selling stocks in a terminal is a very complex activity .Don't get bothered about the technicalities of placing an order or the trading terminal. You should focus more on the fundamentals of choosing a right stock which is aligned to your long term goal. Infact with the trading terminals, placing an order has become so easy. You can do it your self instead of calling your broker and placing an order.
Fact #1: 'Equity is a risky asset'
Equity class is a risky asset. But then 'Risk free ' investments are a myth. Even countries default so you can't say that sovereign bonds are risk free. You must understand your risk appetite and make investments likewise. Of course no one likes losing money but then making money is also an art. You cannot wish to become millionaire by investing in low return risk free asset class. Even if you wish to become an entrepreneur , you are taking a risk , isn't it ?
Fact #2: 'Inflation reduces the purchasing power of money '
Inflation has been at an average rate of 6.27% over the last 20 years. But in real terms, it would be even higher for us. Because the inflation is computed at CPI which includes basket of few essential goods only but for us, if rent is being adjusted by 10% Y-o-Y then it is certainly higher than the average. Similarly, CPI would not consider so called 'luxurious goods' which has become a necessity in today's times like electronic gadgets, clothing, air travel, watching movies in multiplex , etc.
'But How Do I begin'
The start is the most difficult part in any sphere of life. A simple act of peddling a bi-cycle takes a lot of effort in the start but once you get the momentum, it is easy as it gets. Financial discipline is a must.
You can start in 3 simple steps:
'Do not save what is left after spending; instead spend what is left after saving.'
Simple exercise at the beginning of each year can make a lot of difference
Step 1) Identifying your own current Sources of Income and expenses. Bi-furcate your expenses into fixed, recurring, one off, unavoidable. You must keep a check on your spending.
If you don't know where you are going, you'll end up someplace else.'
Step 2) Identify your Long term needs - What are your long term goals? May be buying a house ,a car, a foreign trip. How much will it cost you in future? Do an analysis on that.
A goal without a plan is just a wish.'
Step 3) Prepare a plan of investment as per your needs in Step 2 (Understanding the power of Compounding) . There are many investment options available in India. You must balance between equity and debt investment. Follow the "Rule of 100 minus Age" for asset allocation related to Investing in equity. The rationale behind this is , when you are younger, your risk taking capacity is higher as compared to when you grow older. As we grow, our responsibilities increase and we are not in a position to take too much risks.In addition to this, you must invest in PPF. I have seen people not investing in PPF. Taxes eat a lot of the earnings and when we have a financial instrument which gives you Exempt-Exempt-Exempt option , you must latch onto it.
Open a demat, start tracking IPOs, read news paper, keep your self updated , attend AGMs- Easiest way to start. What you learn, complement it with real life teachings. Don't be lured by money only.
Lastly , I leave you with some timeless readings to learn about investment. Remember, learning is a life long process but you should also implement what you learn. The best investment that you can make is in yourself. Take calculated risks in life. Do let me know in comments section what else are your doubts or want me to write on, I would surely oblige. All the very best for a bright future.
- The Intelligent Investor ~ Benjamin Graham
- Security Analysis ~ Benjamin Graham
- One Up On Wall Street ~ Peter Lynch
- Common Stocks and Uncommon Profits and Other Writings ~ Philip A. Fisher
- Warren Buffett's Letters to Shareholders
- The Black Swan ~ Nassim Nicholas Taleb
- Fooled by Randomness~ Nassim Nicholas Taleb
- Accounting for Value ~ Stephen Penman
- It's Earnings That Count ~ Hewitt Heiserman
- Financial Statement Analysis: A Practitioner's Guide ~ Martin S. Fridson
- Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports ~ Howard M. Schilit
- Creative Cash Flow Reporting ~ Charles W. Mulford
- Financial Warnings ~ Charles W. Mulford
As a small initiative to ignite the investment discipline and understanding, I have started a youtube channel. Please like, subscribe and share the channel and in the comment section do let me know , on what other topics you want me to share about, I will definitely cater to it . Thanks!
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