How good investing works
We all want more money. Working harder is definitely one way of achieving that. However, there is a limit to the number of hours you can work in a day. And there’s no point making more money if you have no time to enjoy it. Now, what if your money could earn more money for you? That is what investing is all about – putting your money to work.
If you are more worried about safety than about making money, think about it this way. By keeping your money in a bank account, you’re not only making a low return on your investment but you’re also at risk of slowly losing your money to inflation over time. The truth is, it’s not worth the safety. In order to understand why investing is the right thing to do, you just have to understand how it works. Here’s our four step formula for good investing.
1. Where to invest: You can invest your money in stocks, bonds, gold, real estate. Or just mutual funds that invest in any one of these. (Mutual funds are professionally managed by someone else, so you don’t have to worry about doing it yourself.) These investment options are referred to as asset classes. Investments in various asset classes don’t go up and down in sync. So, in order to even out the fluctuations, you need to invest your money in a combination of asset classes. This way you can spread out the risks. (Read ‘Why diversification matters’ to explore the link between diversification and your portfolio risk).
2. How much to invest: Investment returns are directly related to the number of risky assets in a portfolio. Talking about risk- are you into fast cars, adventure sports and thrill? Or do you enjoy the calmness and safety of reading a book in your backyard? Risk tolerance is something similar, but it’s about your investments. Hence, before investing, decide how much risk you are willing to take so that you don’t lose sleep during a market downturn. The proportion of equities and bonds in your portfolio is decided by this. Part of what we do at Millennium is to help you figure out where on that spectrum you should be and then build portfolios according to that risk level.
3. When to invest: This is the easiest of the four steps- invest as soon as you get the money. Over time everything moves up. So the sooner you start, the longer you have for your money to grow. If you are getting a salary every month, start an SIP so that you can invest as soon as it comes in. And if you are waiting for the markets to fall or rise or whatever, just remember that even the best of investors rarely get that right.
4. What to do after investing: If you have invested for the long term, you should ideally not look at the investments every now and then. It’s important to ignore the market movements and stay invested. But you do need to review your investments periodically to see how they are performing and make small changes if necessary. Over time, as the market moves, the values of various asset classes change. This can change the proportion of debt and equity in your portfolio making it more or less risky than is ideal for you. Your portfolio will have to be rebalanced to suit your risk.
The days when people worked the same job for years and then retired to a nice pension are gone. Investing is becoming a necessity for people who want financial freedom and a sense of security. What are you waiting for? Start Investing now.
