Investing is not solely reserved for the affluent. It’s crucial to work diligently in one’s professional life and save money, but it’s equally imperative to invest wisely, ensuring that your money is working just as hard for you. Regrettably, fundamental concepts of investing are often neglected in schools.
Today, we aim to share 10 principles of investing that we wish we had learned at a younger age:
Savings is different from investing: Saving involves setting aside money for future needs or emergencies, typically in low-risk, easily accessible accounts like savings accounts. Investing, on the other hand, involves putting money into assets with the expectation of generating returns over time, often with some level of risk involved.
Goal of investing is to beat ‘inflation’: Inflation refers to the general increase in prices of goods and services over time. The goal of investing is not just to preserve the value of money but also to ensure it grows at a rate higher than the inflation rate. Otherwise, the purchasing power of money decreases over time.
Compound interest: Compound interest is the concept of earning interest on both the initial principal and the accumulated interest from previous periods. Over time, compounding can significantly increase the value of an investment, as earnings generate their own earnings.
Dollar Cost Averaging (‘SIP’): This strategy involves investing a fixed amount of money at regular intervals, regardless of market conditions. By doing so, investors buy more shares when prices are low and fewer shares when prices are high, potentially reducing the overall cost per share over time.
Asset Allocation: Asset allocation involves spreading investments across different asset classes such as stocks, bonds, real estate, and cash equivalents. Since different assets perform differently under various market conditions, diversifying across asset classes can help manage risk and optimize returns.
Risk is different from volatility: Risk refers to the potential for loss, while volatility is the degree of variation of a trading price series over time. Understanding this difference is crucial, as not all volatility equates to risk, especially for long-term investors.
Keep taxes at the lowest possible: Taxes can eat into investment returns, so it’s essential to minimize tax liabilities whenever possible. Strategies such as booking profits under section 112A every year, investing in equity-oriented mutual funds for more than one year for lower taxation, taking benefit of indexation and investing in ULIPs up to the maximum possible limit will help reduce the tax burden.
Odds of succeeding increases as the time horizon increases: Investing with a longer time horizon typically reduces the impact of short-term market volatility and allows investments to potentially recover from downturns. Over longer periods, there’s historically a greater likelihood of achieving positive returns, as markets tend to trend upwards over time despite short-term fluctuations.
Market works in cycles: Markets are inherently cyclical, experiencing periods of expansion, contraction, and consolidation. Recognizing these cycles can help investors navigate market fluctuations more effectively. Strategies such as buying low during market downturns and selling high during periods of growth can capitalize on market cycles.
A stock is not a lottery ticket but an ownership in the business: Investing in stocks means buying ownership stakes in companies. Unlike lottery tickets, which offer purely speculative returns based on chance, stocks represent ownership in real businesses with tangible assets, revenues, and earnings potential. Understanding this fundamental principle can lead to more prudent investment decisions based on the fundamentals of the underlying businesses.
