All of us envy the Tatas, Birlas and the Ambanis and wish we had that kind of money. Sure, they may have had a better headstart than us to get to where they are. Many people on a monthly salary believe that after taking care of their daily expenses, they will have nothing left and can never get rich. Wrong!
What lessons can we learn from the rich? How can we copy their strategies?
When you research how rich people got there, you will notice that all of them – no exceptions! — put their investment into several categories. This is called asset allocation. They decided how much money they need for, say, the education of their children, or to buy property or for travel. They have a clear idea and a budget for each category. Yes, even Bill Gates and Warren Buffet have a budget for each category and stick to it. Those of you who signed up with us have already been through this process and have allocated your assets based on your conditions.
Invest based on your age
The first step you should take is to invest based on your age. Obviously, you can take more risks when you are young than when you are old. When you are young, say, in your 20s, your portfolio should have more high-risk investments. The yield is high, but so are the risks. But remember, you CAN afford to take such risks at that age. When you are, say, 85 years old, you cannot ride out a whole market cycle of five or seven years. At that stage in life, you should play it safe and put nearly all your money in safe instruments and live off them.
Know how much risk you can take
I once knew a 26-year-old IT professional—we’ll call her Swetha—who refused to invest in the stock market. Swetha’s reasoning was that her father invested a lot of money playing the stock market daily. He lost nearly all his wealth and became a pauper. Swetha concluded – wrongly – that if you invest in the stock market you will lose all your money and only traders and brokers make money! I had to explain that her father had not done any research before investing and was going only by tips from all and sundry.
Let us talk about another person. We’ll call him Basavappa (all names have been changed to ensure privacy). He boasted to his father that he would double the old man’s life savings in a year and said he had the word of his stock broker. He invested in a very risky area called derivatives about which he knew nothing. The market crashed, and the 16 lakhs was reduced to 3 lakhs. The father struggled to conduct his daughter’s wedding. The son had been irresponsible in not realizing that the father could not take any risk with his retirement corpus, especially when there was a wedding to take place in the family.
Some clients ask me if they can invest when the market is high. They are scared that the market will crash. Similarly, when the market crashes, they are reluctant to buy, fearing it might fall even more. But I tell them that if they have a 10- or 15-year horizon, there is nothing to worry about and should continue to invest in the stock market, despite blips. And the way to go about it for most people is through a systematic investment plan in mutual funds.
Once invested, do not keep closing the accounts and shifting from one fund category to another, just because some of them go up or down. The investment choice we make is based on sound research and is tailored to your requirements.
Know where to use leverage
Consider the case of a young couple Anand and Sivasankari. When they were in their late 20s, they bought a huge flat, then bought a plot for Rs. 20 lakh, hoping it would appreciate in value and bring them a windfall. Nearly all their two incomes were going into monthly EMI payments. They had virtually no money for anything else, let alone invest in stocks, bonds, mutual funds or gold. The real estate market became sluggish and the value of the land did not appreciate much at all. Plus, no one was buying the property and thus it was illiquid. If the land value does not rise appreciably, their money will not grow. Plus, note that both their investments are in the same category: property.
We all want to lead a comfortable life and have a house, car, consumer gadgets, a vacation…. The decision must be rational and planned. But many young people today, I find, buy expensive cars just to show off. Many also run up huge credit card expenses to buy latest OELD TVs, high-end music systems, the latest gadgets and other household goods. They cannot resist any “sale” of any e-commerce. Why save and wait when you can instead have it here and now seems to be their philosophy. They don’t realise that the interest on credit cards are huge and they struggle every month to repay the loans. Having bought a car, some of them invariably trade up and buy more and more expensive cars, gadgets and vacations, fooling themselves that these are after all assets. These are lifestyle assets, not wealth assets. They will not grow and appreciate in value. Nearly all of them, on the other hand, will only depreciate.
No asset class can deliver uniform returns year after year. If you have invested in a variety of asset classes, one might underperform, but something else during the same period may do very well. So, the secret to building wealth while reducing risk is to diversify. Some years ago, equity, debt and real estate, oil all had a bumpy ride. Only gold did very well. But in other years, gold did not do well at all. So, should you avoid gold? No! You can invest a portion of your assets in it. How much can be decided only after you discuss it with a financial advisor.
Some people invest in one category and diversity in it. For instance, one businessman, kaviselvam, had an equity portfolio of Rs. 15 lakhs. At start of 2018, as mid caps rose, he took a loan of Rs. 5 lakhs by pledging shares and put it all into mid-caps. By October, it had lost 45%. You should know how to diversify. Putting all your eggs in one basket is dangerous. At the same time, you should keep room for some surplus so that you can take advantage of the market and diversify.
If you need personalised advice to grow wealthy feel free to contact.