Though past performance is not a guarantee for assured returns in future, earning through analysis and learnings from the past will certainly lead to positive outcomes
Investing is an endless journey that continues lifelong. Smart investing generates additional income that helps an individual to overcome the effects of rising inflation and provides incremental cash flow from investment that could fund additional expenses.
With so much happening globally that impacts finances and financial markets, it is imperative for investors to take a breath, evaluate the past and plan for the investing journey ahead. Though past performance is not a guarantee for assured returns in future, earning through analysis and learnings from the past would certainly lead to positive outcomes. At this crucial juncture, these learnings may come handy for investors:
Consider investment income as secondary income, rather than the primary source of income
Income from investments is not a primary source of income for investors. Income from trading is a primary source of income for professional traders, who are qualified and experienced in placing trades in a live market. The level of proficiency expected from professional traders can only be attained through education, professional experience and training. Simply imitating them is not an option to generate income. Income from investment is realised after careful and considerate approach to investments. This journey requires patience and utmost care and adequate learning.
SIP vs EMI
Given an option, Systematic Investment Plan (SIP) gets priority over Equated Monthly Installment (EMI) payable on loan(s) availed for purchase of a house or any other asset or any other purpose. Investment comes first compared to debt. Once a reasonable corpus has been accumulated, an investor may endeavour to take the next leap and sign up for debt. Contrary to this benchmark practice, investors start lining up debt at the inception of their earning and investment journey and miss the chance of building and accumulating wealth. Availing a loan is just another way to sell future earnings to fund present requirements that may not be an ideal option.
Living expenses vs Lifestyle expenses
Shape up lifestyle that is affordable while keeping a check on living expenses. Investment income can fund lifestyle expenses and not living expenses. Investors need to understand the difference between the two types of expenses. Rely on investment income to fund lifestyle expenses, provided these investments are placed to generate income at periodic intervals. Corpus accumulated over time or savings should not be utilised to fund lifestyle expenses. Living expenses should ideally be funded through the occupation that the investor is engaged in. Occupation or profession is the prime source of recurring income.
Financial plan to financial pain
An absence of financial plan leads to financial pain. Every individual needs to have a clear financial plan that envisages expenditure to be incurred over the years and projected sources of income to fund this expenditure. Any gaps or deficit that is envisaged will assist in curtailing non-priority expenditure to minimise this deficit. Debts should not be opted to fund deficit, rather, expenditure should be curtailed to match cash flow. Lack of financial planning today is a sure recipe for financial pain tomorrow.
Asset light & investment heavy vs Investment light and asset heavy
There is an absolute difference between the two. Asset light is ideal that would leave room for investments to accumulate wealth over the years. Buying assets be it out of desire or out of compulsion because others are buying or the offers are too lucrative would lead to undue stress on cash flows and open doors for unwarranted debt that would eat away all prospects for savings and ultimately dilute potential for wealth accumulation. Investors need to be extremely cautious before making a decision to buy and build asset base.
Being a small investor, buy large caps rather than buying small caps like the large investor
An investment journey for an individual starts with a small step. In the initial phase of this journey, risk appetite is less. Equities are a risky asset. Within equities as an asset class, there are large cap stocks (having a substantially high market capitalisation), mid-cap stocks and small cap stocks (having lesser market capitalisation). Large cap stocks tend to be less volatile in comparison to mid-cap stocks and small cap stocks. For a beginner who is at the initial stages of the investment journey, large cap stocks are a better choice.
Importance of diversification in a portfolio
It’s not one tree with one leaf, but leaves. Similarly, it is not one-sided approach but diversification in a portfolio, that is ideal. Investors portfolio does not consist of one category of investments but a diverse spread ranging from fixed deposits, equities, bonds, precious metals, immovable properties, etc. Proportion of each category of investment is subjective and there is no one size fits all equation. Based on risk appetite for every individual, proportion for each category is defined and funds are allocated accordingly. Over exposure in any category, particularly market linked, is a risky bet that is above the risk appetite of many investors. Every investor individual should take a pragmatic approach in allocating funds for every category of investment based on need for recurring income, funds to pay educational expenses for children, emergency fund requirement, lifestyle expenses etc.
Adequate life & medical insurance
It’s not if and or but mandatory. Medical and life insurance both are necessary. Adequate life insurance and medical insurance is a necessity for a family. Life insurance works as a shield for the next of kin in case of any unforeseen situation. Medical insurance covers risk for any unforeseen medical expenses, provided these are covered in medical insurance cover. Insurance policies also offer cover for critical illness, accidents and disability. Individuals should evaluate the need for insurance cover and choose the insurance cover suiting their needs. Not having adequate insurance cover is a risky bet for any family. Ultimately, your health is your real wealth and real investment.
Your income should exceed inflation, net of taxes or bank interest, whichever is higher
Ideally, overall net return from diverse portfolio post taxes applicable, should be higher than interest income being offered by the banks or annual inflation rate. Whilst UAE does not have personal income tax, investors need to take cognizance of the fact that their investment corpus should generate annual returns that exceed inflation, net of taxes, such that value of their money does not deplete as time goes by. Consider this return rate as a base / benchmark for evaluating performance of your portfolio at periodic intervals. For example, if annual inflation is five per cent and rate of income tax is 10 per cent, an investor should generate return on investment corpus exceeding 5.56 per cent annually.
Depend on yourself rather than others for your investment decisions
You are your own CFO of your own life, manage your money as if it is your business and optimise all possible savings and opportunities. There is no reason to place reliance externally unless the individual is convinced. Remember, external assistance comes with a caveat and a rider or a disclaimer, that affects the investor rather than the adviser. Always read all the available documents and information carefully, understand the contents fully and then take a cautious decision.
We wish you the best for your investment journey, that should only progress further, without a pause, adjusting the speed in terms of investing funds from time to time, with the aim to achieve growth, wealth accumulation and minimisation of risk. Let this learning and earning journey of investing continue safely and smoothly.