Don’t wait for the perfect time to invest surplus money !
When I meet investors who are nudging their 40s, I notice a few common themes in their thinking.
- They see investing as a major project that needs elaborate planning.
- Many do not invest much, thinking they have not done enough groundwork.
- They typically have committed the common investing sins, like punting on stocks, and want to do better.
- They are enamoured by the complex and not simple solutions: SIPs seem boring.
- They want to interact better with distributors and relationship managers they meet, but don't know how.
But most of all, they want to do better for themselves and their money. What are the steps they should take?
First, put in place a default plan for investing savings. In the eagerness to invest correctly and make the right choices, money can lie idle and unutilised. The curse of choice is that we either believe that there has to be something better, or carry the regret of having chosen wrongly. To avoid that stress we choose not to act at all. We convince ourselves that the money is at least safe in the bank, and not lost in some hasty investment. Idling money is the most important curse to fix.
Make a simple default plan, that is not the savings bank account. In April every year, choose a few mutual funds, stocks, bonds or anything else that looks good. This will not take more than a day's work. Through the year, simply push your surplus into these choices. Even if some of them are not great, some others will turn out to be right anyway. You can always review at the end of the year and make changes. Deploying your money is more important than choosing the perfect investment. Take the stress out of choosing by having a default plan. You cannot go too wrong investing in a diversified equity fund.
Second, your investing habits need not wait for putting your house in order. Many investors like to first get all their paperwork together. When they think of investing, the cleaning up acts come to the fore. Selling off those duds that are not working, reclaiming those forgotten post office deposits, updating those mutual fund folios, hunting for that PF from the first employer which has been forgotten, searching that bank account in which some money is lying, are all tasks that come to mind when one thinks of investing. Do not allow these burdensome tasks to bog you down. You can begin anyway. And slowly work on these sins of the past on the side and over time.
Third, do not wait to do it right always. Informed investors in their 40s know that their bankers earn a commission on the investments and do not care much for their relationship manager. They also know that it is not easy to find a good independent financial adviser. They know broking houses may make recommendations that can go wrong. They are aware that all IPOs won't make money. This knowledge about what is wrong in the financial services industry can lead the desire for only the best. The perfect picture in their mind hurts quick implementation.
Many friends of mine are convinced that they will invest directly in a mutual fund to reduce costs, and will choose and manage these funds carefully. But they do not find the time and energy to act on this desirable approach to investing, and their money lies in the savings bank. It is important to implement the investment plan and not fret too much about making it perfect. It is fine to pay some commissions and costs, to enjoy the benefits of investing.
Fourth, make your investment strategy and principles first. It is easier to evaluate choices once you have done that. A guilt-ridden 40-year-old who knows that something has to be done about the savings that is accumulating, can end up making a few rash decisions when a friend or colleague pitches for it. After months of waiting for the perfect thing to do, and to do it systematically, our friend may end up booking that upcoming site in the outskirts of the city, or subscribing to the expensive PMS. All investments offer a unique combination of income, capital appreciation and liquidity. These are three diverse outcomes and each one of us have to make a trade-off based on our needs and circumstances. To my mind, 40-year olds who are earning a steady income and have a PF, already have enough income yielding investments. What they need are growth investments and an equity portfolio is the best bet. It is easy to build this portfolio using a a combination of mutual funds, direct investing, PMS and PE funds in that order of ease, costs, returns and risk. Take the time to decide what you need, and then make decisions that align to that strategy.
Fifth, do not underestimate what you can end up with. Successful 40-year olds still have 20 years of peak career opportunities ahead. Many of them will realise their potential in their profession, earning much higher than they imagined. It is important to keep that in perspective while sweating about investing a few lakhs today. Your personal wealth has the potential to multiply into a sizeable sum that worrying about the right time might be needless. When I was 40, the Sensex was at 3,000 level, and as I invested in a market that had run up on expectations of a turnaround and crashed when the US invaded Iraq, my friends worried about my timing. Today, I know that investing my surpluses in equity without worrying too much about timing is what has helped me. The money you save today will seem like a big deal, but your focus should not be on its present value, but its potential future value if you did not let it lie idle.
When it comes to investing, it is not necessary to do it all in one go, or do it first before you begin to invest. It is like taking your boat into the river anyway, and enjoying the journey. Just the basics are enough to get in, and the rest you will figure along the way. Do not sit there on the banks, waiting for the perfect time. (Source - economictimes)
SIP = Systematic Investment Plan
PF = Provident Fund
PMS = Portfolio Management Services
PE = Private Equity
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