You wish to create a big corpus over a long period of time. You know that serious wealth creation is a multi decade, multi generational goal. So what are the very important steps that are needed to achieve that wealth creation goal? Let me tell you some of the very important ones:
- Learn and understand how compounding works. If you are a parent teach it to your kid. If this is the only thing that you know (or teach your kid) your life is on track.
- Learn to postpone consumption. The sheer act of immediate appeasement is to be just given up. Postpone by a day, week, month or year depending upon the ‘urge’ and the amount involved. The more you learn the art of deferring, the stronger your mind and body are.
- Start saving and Investing, NOW. When you learn the power of compounding, you will realize the power of ‘n’. So start as soon as possible.
- Set savings / investing goals and live frugally. Once you learn to live frugally the sheer joy of seeing your money growing will push you to invest more. Make sure that the goals are reasonable, and you have the satisfaction of achieving the goals.
- Look at market returns over long periods. Look at the US markets, Indian markets and find out the various asset classes – equities (large cap, mid cap, multi cap) funds, debt products (PPF), estimate returns over a 30 year return. Understanding yourself, and the products is very essential for a good corpus creation.
- Manage risk. If your daughter is 8 years of age and you are investing for her education, remember the whole event is 13 years away…and the risk of not having enough money is as real as the volatility which worries you. So there has to be a lot of equity in your portfolio, and of course it can (and ha welcome to volatility too!!)
- Diversify smartly. Across industries, geographies, business groups, etc. If you are a mutual fund investor across large cap, mid cap, multi cap, hybrid funds, and please invest to a plan. Creating your ‘why of investing’ and a ‘philosophy of investing’ are both essential for you to create a sensible amount of wealth.
- Have patience, and remember people have described the stock market is a place which transfers the money from the active trader to the patient investor. Remember that the power of compounding teaches you that most of the big returns are back ended. Maintaining a long term perspective and slowly investing your money on a regular basis is a nice rout to wealth creation. In Colgate an investment of Rs. 1250 in 1977 the dividends are about Rs. 100,000 in 2015. Just the power of compounding and the ability to reinvest the Rs. 100,000 ensures higher compounding.
- Trying to time the market (the opposite of point no. 8) does not work for most of us. Watching business channels to see what the experts say about which industry will do well, which sector will lead, which share is the best to buy NOW etc. is of no use. So read books on investing but not the magazines, watching television is corrupting, and does not help. Stay away from television if you want to be a serious investor.
- Be careful about the taxes that you pay. If you can get 8-9% per annum tax free in debt instruments you are doing great. PPF is one instrument which does it for you. You could even choose to be in Growth plans of debt funds and pay tax after a very long period – say 15 years. This amazingly improves your power of compounding and thus the growth of the money. So even if you want to be in debt choose national savings certificates, growth option of debt schemes, ppf, etc. and pay tax back ended instead of paying it annually. Remember 60 years and 80 years are important in your tax life. You move on to a lower tax slab..so plan your investing and your taxes accordingly.
- Do not over pay on loads, advisor fees, management fee – that can hurt. Keep away from bank advisors and tied advisors whose job is to sell you schemes that they represent. If you have learnt enough about investing, you can do it yourself. If you are not confident, go to a good advisor but pay on time basis and not on AUM basis – unless it Is a one time fee.
- Beware of the hot hands and hot sectors. If you do not have a good philosophy of investing, there is a chance that you will get carried away by ‘today’s best buy’ or ‘top performing fund’ for the month and such challenges…
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