4 things every young investor must know

By Larissa Fernand |  12-06-20 | 
 

Embarking on the journey to financial independence is exciting and intimidating. But you don’t have to be a wizard at finance to get started. Here are four principles upon which you can build a strong foundation.

1. The race is long and, in the end, it’s only with yourself. 

Christine Benz, Morningstar’s director of personal finance, recently recollected on her years after college, where a certain competitive spirit prevailed among her peers. More than at any other time before that or since, she remembered feeling especially attuned to who had landed the most lucrative job, who purchased a home first, and so on.

In hindsight, those comparisons weren't predictive: Peers who got off to a fast start didn't universally end up ahead. And in any case, comparing ourselves to our peers--or worse yet, people we think are doing better than us--isn't helpful to our own financial well-being.

Without much ado, let’s swallow the bitter pill. We are hard wired to make comparisons across every domain- beauty, wealth, intelligence, success, and whatever else that does not fall in the above categories. That is the reality of human nature. Morningstar’s behavioural economist Sarah Newcomb seconds that: “We can’t turn them off, we can only channel them.”

Instead of wasting energy on frequent and toxic upward comparisons, that only make you stressed and discontented, compare yourself to a role model. When you have a role model or mentor, you have a desire to learn and get better.

Think about someone whose financial life or behaviour you admire. You could look up to them for their contentment, lack of stress over money, their ability to live below their means, their humility in not wanting to impress others, their minimalism. You don’t need to know them or their finances well. The point is to find someone whose lifestyle you admire (even if you only have a glimpse), and that you think you can realistically achieve for yourself over time. Make sure the goal you are setting is realistic, positive, and practical.

2. Life is unpredictable. All surprises are not pleasant.

A friend of mine lost his job at Jet Airways. During the last few months of employment, he never got his dues. Fortunately, he got a job in another airline but took a substantial salary cut. Now, thanks to the pandemic lockdown, aviation has been detrimentally hit, and he has been forced to take a 40% pay cut. Another friend, in another airline, feels blessed that his pay cut is just 15%.

While they have to adapt to the new normal till business normalises, emergencies can come in various forms. It can be a house repair, a sickness, a job loss.

An emergency can be emotionally very stressful. Don’t add financial stress to it. Be prepared, as far as possible. Do keep money aside in an emergency fund which you will not resort to when planning your next vacation.

Most people keep a bank fixed deposit as an emergency fund. But emergencies, by nature, do not occur frequently. One may not have to dip into this kitty for years on end. So if you are looking at a vehicle that generates a better post-tax return, you could also consider a Liquid/Ultra Short Term Bond Fund. Investing in very short duration mutual fund scheme can give the benefit of indexation as well.

Or, it need not be either. It could be a combination of both.

Don’t worry if you do not have the money, you can build the emergency fund gradually. Here is a step-by-step guide on how to go about it.

3. Invest in yourself. It is the one investment that supersedes all others.

Look at ROI – Return on Investment, from all facets.

One of the best investments you will ever make is in your own human capital—your lifetime earnings power. Just like investing in the market, the earlier they make additional investments in human capital and additional education, the more it's likely to pay off.

Additional education needn't entail advance degrees and/or hundreds of thousands dollars, either: Pursuing certifications and developing new skills can lead to salary increases, too, and many employers offer tuition assistance for further education and training.

Invest in human capital before life gets complicated. From a practical standpoint, many youngsters are relatively unburdened with family and other obligations in their early and mid-20s, making it an ideal time to tackle further education.

ROI can be a valuable compass for multitaskers throughout their lives. It helps you identify the best uses of your capital, time and energy, at any given point. And even which relationships are worth investing into.

4. Play a long game. So it does not matter if you start really small.

You might be surprised at just how little it takes to get started in investing--and how much those early investments can add up. Rs 1,000 as an initial investment with additional Rs 100 each month for 40 years, earning a 7% rate of return, would add up to Rs 2.80 lakh.

It's also wise to set expectations. When it comes to the stock market, be aware of the importance of sitting tight or even adding more during the downswings. Don’t obsess over your portfolio.

But when you look at the effect of compounding over the long term, it is not just financial. Compounding is something that should be inculcated in every aspect of life. Be it healthy eating, gaining knowledge, reading, exercise or investing. The effects can be seen over time.

Stay focused on your goals. In a world of distraction, this is a tremendous edge to have.

Christine Benz’s views were taken as the base and adapted for young Indian investors.

Investment Involves Risk of Loss

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