Time waits for no one | Start now!

The journey to financial stability often begins with the daunting task of saving and investing. For many, the initial start can be scrary due to two primary reasons: there is a perception that investing is too complicated and the belief that you will start later as cannot afford to save.  However, overcoming these hurdles is crucial, as time in the market plays a pivotal role in wealth building through the power of compounding. Delaying the process can significantly diminish long-term financial outcomes, making early action essential.

TThe first barrier—feeling nervous about one's expertise —stems from the complexity often associated with investing. Most peope are familiar with bank fixed deposits and gold. But beyond that the investing process can be duanting. One can feel a bit scared with jargon, charts, and endless options. Which is why people feel that such decisions are best left to experts. Many beginners fear making mistakes, such as choosing the wrong stocks or losing money due to market volatility. The recent spurt in financial scams has further complicated the matters. This intimidation often leads to paralysis, where individuals avoid investing altogether, waiting for the "perfect" moment when they feel sufficiently knowledgeable. However, this hesitation overlooks a key truth: investing is a skill honed through experience. Starting with small, manageable steps is critical. Rest assured that if you start without taking too many risks, you will learn along the way.  Hopefully without losing much.  The reality is that you don’t need to be a financial guru to begin; you simply need to start.

The second barrier is the misconception that there’s plenty of time to save and invest later. I often find young people have a philosophical view of things. Many prefer to prioritize immedite experiences like travel, dining, or lifestyle purchases—over long-term financial goals, assuming they can catch up in the future. This mindset underestimates the exponential benefits of starting early. Time is the most critical factor in the compounding process, where earnings gcan grow rapidly over the first ten or fifteen years. Watch this video about the magic of compounding.

Time will always be your friend.  Delaying investment not only shortens the compounding period but also increases the pressure to save larger amounts later to achieve the same goals. If you sit down and calculated the amount of funds you will require at the time of retirement, accounting for inflation and importantly, to the impact of lifestyle creep, you will realise the value of starting early. 

In conclusion, the barriers to saving and investing—lack of knowledge and the temptation to delay—are surmountable. Investing doesn’t require a lot of  expertise; it demands action. Start now. By starting early, even with small amounts, individuals harness the power of compounding, making time their greatest ally. The process need not be complicated—simple, consistent investments can pave the way to financial security. 

The key is to begin now, as every day delayed is an opportunity lost.The first barrier—feeling nervous about one's expertise —stems from the complexity The journey to financial stability often begins with the daunting task of saving and investing. For many, the initial start can be scrary due to two primary reasons: there is a perception that investing is too complicated and the belief that you will start later as cannot afford to save.  However, overcoming these hurdles is crucial, as time in the market plays a pivotal role in wealth building through the power of compounding. Delaying the process can significantly diminish long-term financial outcomes, making early action essential.

The first barrier—feeling nervous about one's expertise —stems from the complexity often associated with investing. Most peope are familiar with bank fixed deposits and gold. But beyond that the investing process can be duanting. One can feel a bit scared with jargon, charts, and endless options. Which is why people feel that such decisions are best left to experts. Many beginners fear making mistakes, such as choosing the wrong stocks or losing money due to market volatility. The recent spurt in financial scams has further complicated the matters. This intimidation often leads to paralysis, where individuals avoid investing altogether, waiting for the "perfect" moment when they feel sufficiently knowledgeable. However, this hesitation overlooks a key truth: investing is a skill honed through experience. Starting with small, manageable steps is critical. Rest assured that if you start without taking too many risks, you will learn along the way.  Hopefully without losing much.  The reality is that you don’t need to be a financial guru to begin; you simply need to start.

The second barrier is the misconception that there’s plenty of time to save and invest later. I often find young people have a philosophical view of things. Many prefer to prioritize immedite experiences like travel, dining, or lifestyle purchases—over long-term financial goals, assuming they can catch up in the future. This mindset underestimates the exponential benefits of starting early. Time is the most critical factor in the compounding process, where earnings gcan grow rapidly over the first ten or fifteen years. Watch this video about the magic of compounding.

Time will always be your friend.  Delaying investment not only shortens the compounding period but also increases the pressure to save larger amounts later to achieve the same goals. If you sit down and calculated the amount of funds you will require at the time of retirement, accounting for inflation and importantly, to the impact of lifestyle creep, you will realise the value of starting early. 

In conclusion, the barriers to saving and investing—lack of knowledge and the temptation to delay—are surmountable. Investing doesn’t require a lot of  expertise; it demands action. Start now. By starting early, even with small amounts, individuals harness the power of compounding, making time their greatest ally. The process need not be complicated—simple, consistent investments can pave the way to financial security. 

The key is to begin now, as every day delayed is an opportunity lost.often associated with investing. Most peope are familiar with bank fixed deposits and gold. But beyond that the investing process can be duanting. One can feel a bit scared with jargon, charts, and endless options. Which is why people feel that such decisions are best left to experts. Many beginners fear making mistakes, such as choosing the wrong stocks or losing money due to market volatility. The recent spurt in financial scams has further complicated the matters. This intimidation often leads to paralysis, where individuals avoid investing altogether, waiting for the "perfect" moment when they feel sufficiently knowledgeable. However, this hesitation overlooks a key truth: investing is a skill honed through experience. Starting with small, manageable steps is critical. Rest assured that if you start without taking too many risks, you will learn along the way.  Hopefully without losing much.  The reality is that you don’t need to be a financial guru to begin; you simply need to start.

The second barrier is the misconception that there’s plenty of time to save and invest later. I often find young people have a philosophical view of things. Many prefer to prioritize immedite experiences like travel, dining, or lifestyle purchases—over long-term financial goals, assuming they can catch up in the future. This mindset underestimates the exponential benefits of starting early. Time is the most critical factor in the compounding process, where earnings gcan grow rapidly over the first ten or fifteen years. Watch this video about the magic of compounding.

Time will always be your friend.  Delaying investment not only shortens the compounding period but also increases the pressure to save larger amounts later to achieve the same goals. If you sit down and calculated the amount of funds you will require at the time of retirement, accounting for inflation and importantly, to the impact of lifestyle creep, you will realise the value of starting early. 

In conclusion, the barriers to saving and investing—lack of knowledge and the temptation to delay—are surmountable. Investing doesn’t require a lot of  expertise; it demands action. Start now. By starting early, even with small amounts, individuals harness the power of compounding, making time their greatest ally. The process need not be complicated—simple, consistent investments can pave the way to financial security. 

The key is to begin now, as every day delayed is an opportunity lost.

Winning the race starts with saving

In an era defined by economic uncertainty and rapid change, developing a habit of saving money is not just prudent but essential for financial stability and long-term security. Saving is more than a mere act of setting aside funds; it is a disciplined practice that lays the groundwork for achieving significant life goals. By prioritizing consistent saving, individuals can build a robust financial foundation for the future

Size Matters

The cornerstone of effective saving is consistency. Regularly allocating a portion of income to savings, regardless of the amount is critical. Setting aside even a modest percentage of income each month can accumulate into a substantial fund, providing a buffer against life’s unpredictability. Consistency in saving also aligns with the principle of paying oneself first, a strategy that prioritizes personal financial health before discretionary spending. Over time, this disciplined approach builds a portfolio of sufficient size to support larger financial goals or planning for retirement.

Focusing on building a minimum portfolio size before chasing high returns is a critical aspect of sound financial planning. Rushing to maximize returns without a solid foundation often leads to speculative investments, which carry significant risks. High-return opportunities, such as volatile stocks or unregulated cryptocurrencies, may promise quick gains but can result in substantial losses, particularly for those without the capital to absorb setbacks. By contrast, a conservative approachensures steady growth while safeguarding principal investments. This strategy aligns with the wisdom of gradual wealth accumulation, where the power of compound interest transforms small, regular contributions into significant wealth over time.

The risk of over ambition

The pursuit of maximizing returns often introduces unnecessary risks that can undermine the process. A disciplined saver, however, is better positioned to avoid such pitfalls by maintaining a balanced portfolio that prioritizes stability over speculative gains. This approach does not preclude investing but advocates for informed, calculated decisions once a sufficient savings base is established.

In conclusion, cultivating a habit of saving money is a fundamental step toward financial empowerment. The value of saving is often overshadowed. By embracing consistency and discipline, individuals can build a minimum portfolio size that serves as a springboard for future opportunities without exposing themselves to undue risks. In a world where financial temptations abound, the ability to save diligently ensures not only security but also the freedom to pursue dreams with confidence.

Yes, You can save and invest

 One regular lament that I hear frequently is that it is not possible to save based on the current income. I often hear that by the time the month is over, all the money is gone. Which is a real struggle for many people.  And yet there are many wasted opportunities to do better.   Managing finances on a low income can be challenging, but with careful planning, it’s possible to stretch every rupee.

Budgeting is a powerful tool that helps prioritize essential expenses, reduce wasteful spending, and build a foundation for future goals. Start by understanding your financial flow. Calculate your total monthly income and expenditure. Next, categorize them into necessities (rent, utilities, food) and non-essentials (entertainment, dining out). A good starting point is to tally the income and expenditure. This clarity reveals spending patterns and areas where adjustments can be made.

Once you have made a list of income and expenses, start noting down the actual spend each time you make a payment. This will include every type of expense, even the idle sambaar that you had today. I know this can be tedious and often irritating but there is a reward at the end. Once you keep records of all the expenses and type of expenses, you will be able to identify areas to reduce discretionary spending. For example, limit dining out, and opt for home-cooked meals. Shop at discount stores or thrift shops for clothing and household items. Small changes, like brewing coffee at home instead of buying it daily, can save hundreds annually.

Food is a major expense, but strategic shopping can lower costs. Plan meals weekly and create a grocery list to avoid impulse buys. Cook in bulk for the entire week and store the daily requirment in a fridge. Buy in bulk for staples like rice or atta, and choose generic brands over name brands. Look for sales, use coupons, and shop at budget-friendly stores. Preparing meals in batches can also save time and reduce the temptation to eat out.

A budget isn’t static. Review it monthly to assess what’s working and what isn’t. Adjust allocations as needed, especially if income or expenses change. Stay flexible but disciplined to maintain control over your finances.

By tracking spending, prioritizing needs, and making small, intentional changes, low-income earners can create a sustainable savings and investments that fosters financial security and peace of mind.

And despite all, if you cannot manage to save 10% to 20% of your current income, you clearly cannot afford your current lifestyle!

Habits make you rich

Investing habits are often more critical than chasing the highest possible returns because they foster consistency, discipline, and long-term success in wealth-building. While high returns can seem appealing, they are typically accompanied by higher risks and are often unsustainable over time. In contrast, strong investing habits—such as regular SIPs, diversification, and a focus on long-term goals—create a stable foundation that compounds wealth reliably, reduces emotional decision-making, and mitigates risks. Below, I’ll explore why cultivating robust investing habits outweighs the pursuit of maximum returns, covering aspects like consistency, risk management, emotional discipline, and adaptability.

1. Consistency Builds Wealth Through Compounding

One of the most powerful arguments for prioritizing investing habits is the role of consistency in harnessing the power of compounding. Compounding allows your investments to grow exponentially over time as returns generate additional returns. However, this process requires regular contributions and time in the market, which are rooted in disciplined habits.

For example, consider two investors: Investor A chases high returns by sporadically investing large sums in volatile assets, while Investor B invests Rs. 500 monthly in a diversified index fund with an average 11% annual return. Over 30 years, Investor B’s consistent contributions could grow significantly more over investor A even if the returns are modest. Investor A, despite occasionally hitting high returns, is likely to miss out on compounding opportunities due to inconsistent investments or losses from risky bets. The habit of regular investing ensures that you stay in the market, benefiting from its long-term upward trajectory.

Market timing—trying to buy low and sell high—is notoriously difficult, even for professionals. By automating investments, you develop a habit that keeps you invested through market ups and downs, maximizing your exposure to compounding.

2. Risk Management Through Diversification

Another reason habits trump returns is their role in effective risk management. Chasing high returns often leads investors to concentrate their portfolios in a few high-risk assets, such as individual stocks, options trading, or speculative ventures. While these can yield spectacular gains, they also expose investors to significant losses. In contrast, a habitual approach to diversification—spreading investments across asset classes like stocks, FDs (yes I mention FDs), and real estate—reduces risk while still providing solid returns.

The habit of regularly rebalancing your portfolio ensures that your asset allocation aligns with your risk tolerance and goals.

Historical data supports this approach. Diversified portfolios with a mix of stocks and bonds have historically delivered steady returns with lower volatility than concentrated portfolios. By making diversification and rebalancing habitual, you prioritize stability over the allure of outsized returns, protecting your wealth from market downturns.

3. Emotional Discipline and Avoiding Behavioral Pitfalls

Investing is as much a psychological endeavor as it is a financial one. The pursuit of high returns often leads to emotional decision-making, such as panic-selling during market crashes or chasing “hot” investments during bubbles. These behaviors can devastate long-term performance. Strong investing habits, however, promote emotional discipline, helping you avoid common behavioral pitfalls.

For instance, the habit of sticking to a predefined investment plan—such as contributing a fixed percentage of income or ignoring short-term market noise—reduces the influence of fear and greed. During the 2008 financial crisis, investors who sold in panic locked in losses, while those who maintained their regular contributions recovered and benefited from the subsequent bull market.

Another key habit is focusing on what you can control, such as savings rate and asset allocation, rather than obsessing over unpredictable returns. This mindset shift fosters resilience, as you’re less likely to be swayed by market headlines or social media hype. By cultivating habits like reviewing your portfolio quarterly (not daily) or consulting a financial plan before making changes, you build a framework that insulates your decisions from emotional impulses.

4. Long-Term Focus Over Short-Term Gains

Chasing the best returns often involves a short-term mindset, where investors jump from one trendy asset to another, incurring transaction costs and tax liabilities. In contrast, investing habits emphasize a long-term perspective, which aligns with the reality that wealth-building is a marathon, not a sprint.

The habit of setting clear, long-term goals—such as saving for retirement, a child’s education, or financial independence—keeps you grounded. These goals guide your investment choices, encouraging you to select assets that align with your timeline and risk tolerance rather than chasing fleeting opportunities.

5. The Cost of Chasing Returns

Finally, the pursuit of high returns often comes with hidden costs that erode wealth. High-risk investments may involve steep fees, such as those charged by PMS or actively managed portfolios. Frequent trading to capture gains incurs transaction costs and capital gains taxes, further diminishing returns. In contrast, habits like investing in low-cost, diversified funds and minimizing portfolio turnover reduce expenses, allowing more of your money to compound

In summary, investing habits are more important than chasing the best returns because they promote consistency, risk management, emotional discipline, a long-term focus, adaptability, and cost efficiency. While high returns are tempting, they often come with unsustainable risks and behavioral traps that undermine wealth-building. By cultivating habits like regular investing, diversification, and staying informed, you create a robust framework for financial success. These habits leverage the power of compounding, protect against market volatility, and align your actions with your long-term goals. Ultimately, it’s not the investor who hits the occasional six but the one who consistently shows up to the plate who builds lasting wealth.

Market Volatility

 Market volatility can be unnerving. Some of the most seasoned investors with several decades of experience can suddenly start questioning their philosophy and decisions. Even the best are likley to suffer self doubt where the markets go through turmoil; specially after it follows a long period of a bull market. So how does one navigate these times?

First of all remember that since a long time in history, every fall has been followed by the next bull market.  If you back at the historical data of the Nifty 50, you will observe many occassions when the markets have dropped by 15% - 20% only to recover and move to new highs.  Why will it be any different this time? Remember to trust the capitalists!!!

Remember that the markets will eventually recover, often very quickly and sharply. So stay invested.  The turnaround can never be predicted but it will come eventually. Staying out of the market in times of turmoil is often very risky. If you are not invested at this time and the market turns around you will not have the opportunity to be a part of the recovery. Stay invested

The other common situation is investors trying to time the market. There is that strong fear that the markets will continue to drop leading to increasing losses. There is often the temptation to exit the market, either wholly or partly, with an intention to get back into the market at the bottom. If you follow this approach, you are sure to have a very painful investment journey.  Investors who exit the market and switch to cash during such volatile times mostly underperform those that stay invested. It is very diffiult to time the market.  By the time the market turns around and you try to get back into the market, the best opportunity will have already gone past you. The longer you stay out of the market, the worse your performance will be.

So in times of volatility, tune out the noise. There will be many opinions and recommendations that you will come across.  Shut the noise out. 

Stay the course!!

Temperament is crucial

In the area of investing, temperament is more important than IQ.  As per Warren Buffet, succesful investing does not correlate with IQ. Once you have some basic intelligence, what seperates a good investor from a bad one is the ability to stay calm during the ups and downs of the market. Successful long-term investors have the ability to keep calm and remain unpeturbed when the investment environment around them turns volatile. 

A good or a bad temperament can be reflected in several ways and behaviours.  The foremost is the ability to not get impacted by either sharp changes in the market or the narratives that get built around the changes. This becomes even more important in modern times due to social media and due to the speed at which news and information moves around the world. One's patience with the process despite the volatility is very important. Successful investing often requires holding onto assets for the long term, despite the short-term fluctuations. Impatient investors often make poor decisions based on emotional urges to take decisions. Read my post about staying the course here.  Investing is a marathon, not a short sprint. 

Debt - A good or bad idea

This is another one of those very contentious topics that gets a lot of extreme opinions.  So is debt a good or a bad idea?  And like many other subjects in personal finance; it depends!

Debt comes in many forms.  The most simple kind of debt could be a small amount borrowed from a friend or a family member. Another type and probably the more common type is credit card debt. And then the larger debt like a loan to buy a car or a mortgage to buy a house. So which of these could possibly be good debt?  Well, it depends. My personal preference is to separate debt into 2 kinds; debt that is used merely for consumption and that used to purchase a depreciating asset and on the other hand debt used for a productive purpose or to purchase an appreciating asset.

First of all, all debt needs to be repaid at some point and comes with a cost. So the first and probably the most important consideration is whether you can afford it.  Very often, the start of a serious financial crisis starts with a loan that one can't afford to pay back.  And hence it is important that you have confirmed that you can afford to pay back the loan including the interest. Very often there are variable components to the loan, eg the interest rate.  As time passes the interest rates may increase thus increasing your monthly payments. Moreover, you need to assess the risk to your income that helps you to pay back the loan.  Is there a reasonable risk that you will not be able to pay back the monthly instalments in the future? 

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An important consideration is the financial impact of the asset that you are buying. Are you taking on debt to pay for a holiday? Or to buy a depreciating asset like a car.  Remember it may feel exciting to go on a holiday using borrowed money but as soon as the holiday is over in a few days, you will be left with the burden of paying off the loan over a period of time. Pleasure for a few days and financial burden for a few years. Will this be worthwhile? Also understand that the value of car will depreciate the moment it leaves the showroom.  And it will continue to lose value over time while you continue to bear the burden of the debt for many years. In other words, these are examples of non productive debt and I advice people to refrain from taking on such debt.

On the other hand there is productive debt.  Debt that allows you to produce more or create an asset in the future. A good example is a mortgage.  A mortgage allows you to build an asset over time, something that appreciates in value over time. Although a mortgage is as risky as any other debt in terms of risk of affordability, if used wisely, it can help you to build a asset over time and hence I call it good debt as long as you use it wisely. Make sure that the monthly exposure that you have in terms of monthly repayment is set in such a way that you can still afford to pay the EMI even if the rate of interest changes over time. Have enough buffer to account for unforeseen increases in the interest rates.  Then again, should you buy a house or rent it?  Read my post here to know more.

The worst kind of debt is credit card debt which should be avoided at all costs. The interest costs associated with credit card debt are exorbitant and the cost can spiral up very quickly if not managed carefully.

In summary, debt can be good or bad depending on how you use it. Any questions? Post your query in the comments section below.

Trust the capitalists

Remember the doomsday feeling of 2008? Or the panic of March 2020? And in between there have been several instances of the market dropping by 10% or more over a short period.  And each time everyone has felt panic.  That feeling of absolute nervousness.  As if the end is near. 

And in every one of those cases, the markets recovered to make new highs!.  Remember this. The next time the market drops quickly and by a large value, trust the capitalists.  They will continue to build value in the market.  And every one of those drops will be followed by a recovery and a new high.

If you look back into history, you will see this happen over and over again.  A quick glance at the 20 year trend of the Nifty 50 will only confirm this.  That markets have dropped sharply in the past, always to recover and go on to make new highs. Remember October 2005?  The Nifty took a sharp drop from 2644 in early Oct to go down to 2316 by  the end of the month. But the recovery took less than 30 days.  The Nifty 50 moved from a low of 2316 on 28th Oct to trace back to 2664 on 25th Nov 2005. Take a look at Myy 2006. After hovering around the 3754 mark  in early May, the market dropped quickly to 2632 by the middle of June, almost 30% lower.  Then again, the market went on to recover to 3769 by the end of Oct, taking a little while longer. Trust the capitalists!

While the above examples may not be in many people's memories, I am sure the events of 2008 and 2020 will be.  Even the investors who have begun the journey recently will remember the big one of 2020. The panic of COVID-19 was jsut setting in. The sense of an upcoming global pandemic was being felt by the market. I remember watching the news closely as businesses started shutting operations. And then the Nifty 50 took a sharp nosedive. From 12,201 in the middle of February 2020, the market collapsed quickly to reach a low of 7610 within a month on 23rd March.  That amounts a sharp nosedive of about 38%!! Several people were predicting the end of the markets.  Emotions were running high as some even pointed to a very long period of pain. At that point and in the following days, many distraught investors fled the marekt. Some making huge losses as the chaos continued for a few weeks.

 And as I have said several times in this blog, trust the capitalists. Despite the doom and gloom of the pandemic, the market recovered back to the 12,200 mark by early November of 2020. It is not just the recovery that begs attention. It is the strength of the recovery and the momentum thereafter!

It is importatnt that I mention an important consideration. The market will always rise. That does not mean every company will. The markets and investors are vicious.  They celebrate the performers and severely punish the laggards.  And hence every few years, some companies will die, while some others will zoom to the top.  What matters is that you have a broad portfolio that is balanced.  Invest into broad and diversified funds. Have some allocation to broad index funds. It is difficult to pin point which company will be a winner. But not too difficult to point to the fact that the broader markets will continue to rise after every fall. You only got to make sure that you stay the course. 

So as we reflect upon the slight nervousness in the market over the recent moves of the Nifty 50, remember this.  Trust the capitalists.  

The importance of discipline in investing

 Almost everybody I know has alll the information regarding the importance of a healthy diet. But almost all find it difficicult to follow it. The same with investing. And just like the a good healthy diet, one can experience the benefits of investing only if one maintains the strategy for the long term. Markets will rise and markets will fall. And often markets will move sideways for a long time. The key to a successful investing outcome depends on how one reacts to the markets over time.  The secret to success?  Do nothing. 

It is important that ones first sets out the goal and the path to it.  This would involve calculating the end goal of an investment process over time. This should consider the current cost of living, inflation, changes in lifestyle etc. And aside from the final goal, one needs to consider and sign off on the path.  How do you want to go about your investment process? There are several approaches and all could be useful depending on your own style and risk appetite. You can explore the various options in other parts of this blog.If you have a long investment timescale and can afford to sustain some ups and downs, you can probably take a significant amount of risk. If you need the money in 5-10 years and don’t have any other assets, a more cautious approach is required. Read about asset allocation here

Once you have set up the process, stick to it. Many times short term market fluctuations can lead you to doubt your decisions.  Don't let emotions interfere in your investment process. A sharp fall in the market can be stressful, and many investors may sell in panic. But a dip is usually followed by a recovery, and this can happen very quickly. Taking money out means missing out on this recovery. But more importantly, long-term returns are not based on a straight line. The drop and subsequent recovery are not a short-term anomaly that we need to allow to pass – they are a key feature of how the market functions. Remember that every drop in the market in the past has been followed by a recovery.

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Holding a balanced portfolio over a long period of time and adjusting the allocation over time as your risk profile changes is key to a successful investment process. Discipline matters!

The value of 1%

I am often surprised at the casual approach of many people to a small difference in return on investments. How do people react to say a return of 11% per annum compared to a return of 12% per annum.

Most people will not see a large difference and some may respond with a shrug of the shoulders. This is because in absolute terms, it is difficult to comprehend the impact of the 1% difference in return. This is because we are not able to visualize or see the impact over time very easily.

To understand the real impact of the 1%, let us use a simple illustration. Let us assume that an investor has a capital of INR 10,000 to invest. Let us make another important assumption. The investment lifetime of any young person is about 35 years. What will be the final result of this 10,000 invested at 11% over the period of 35 years. Compounded annually at 11%, this small amount of 10,000 will grow to an interesting 3,85,748 over the period of 35 years. While this looks impressive, what will be the final outcome me if the rate of return was just 1% at 12%?

10,000 invested at a rate of return of 12% over a 35 years period will grow to a whopping 5,27,996!!

That is a large difference of 1,42,000 or 37% more money at the end of 35 years. Now that you can see the difference between the final result of investing at 11% or 12%, would you look at the 1% difference the same way?

Interesting right?

Have you been a victim of such thinking in the past? Let me know in the comments below.

Don't be stupid

Don't be stupid, you know I love you

Don't be ridiculous, you know I need you

Don't be absurd, you know I want you

Don't be impossible

The famous lyrics from Shania Twain's hit song are also relevant to the world of investing. Don't be stupid.

It I said that doing badly in the investing process can be as equally difficult as doing very well; as long as one sticks to the basic principles and one does not do anything stupid. Often, managing risk is key to getting the job done. Lack of success in the world of investing has less to do with taking great decisions and more to do with just avoiding stupid stuff. Avoid too much risk and success will follow.

So what are the stupid things that one needs to avoid?

For starters, temper your expectations. Although this is not a decision itself, how one sets expectations has a strong impact on the decisions one will take. If your expectations are within limits, you will tend to take less of stupid decisions that are driven by over expectation and hence disappointments related to the actual performance of your investments. Don't get swayed by what you read on social media. 25% CAGR is not really necessary to succeed. As long as one is achieving 5% to 6% over average inflation, you are already on the path to success. Hence keep your expectations within reasonable limits. 

Maintain a balanced portfolio. Having assets across multiple asset classes will ensure that you ride the cyclical waves of each asset class. There is no need to take unnecessary risk and allocate a disproportionate share to any one asset class based on recent performance. Remember, everything reverts to the mean eventually.

Save and invest aggressively. There is no substitute for this. Consistent investing and holding the investments over a long period of time is a critical element to success. There is no quick magic. And if you read about how other  people are getting rich quickly, run away from such stuff. Stay consistent.

Anything else that you suggest? Mention your suggestion in the comments below

CAGR v/s IRR

Of course!  The most important measure of success as an invester is the rate of return. But what exactly does this mean? And how is it calculated?

There is no greater pleasure than to flaunt your rate of return. Assuming that it is something to be proud of. But more impoertatly, it is important that one is aware of the rate of return so that one can judge the success of the investment process. So how does one measure the rate of return of an investment? Often, many people use absolute return as a measure. Nothing can be as risky as using absolute returns of an investment. Absolute returns refer to the increase in the value of an investment without considering for how long the money has remained investment. So what is the right way to measure the rate of return?

CAGR and IRR are commonly used methods to measure the rate of return.

As the acronym suggests, the compounded annual growth rate (CAGR) indicates the compounded rate of return of an investment on an annual basis, considering the value of the investment at the start and the end of the period. CAGR is commonly used as a measure across several areas of business including to show the growth of a business or sales.  However, the validity of CAGR is limited to calculating the growth rate of an investment between a fixed start and end date. It is not a good indicator when investments are made at multiple points of time. This is where IRR comes in very useful. 

The calculation of CAGR is relatively straight forward. It can 3 inputs; the start value of an investment, the end value of an investment and the period for which the money remained invested.  While the CAGR calculation is an excellent indicator of returns, it becomes limited in use when the investments are made at multiple time periods eg. investments made via an SIP on a monthly basis. IRR is more flexible as it considers multiple cash flows and time periods. 

That begs the question. Which one is a better measure to understand the performance of an investment. Neither is categorically better. IRR is a better measure when investments are made at multiple points over time while CAGR is better suited while measuring the performacne of a lumpsum amount over a period of time.

The Retirement Gamble

 My retirement plan?  Well I plan to pray.  That may be the only way out.

Often folks in their 50s and 60s hope they hit the jackpot. Else retirement could be a a very stressful period. Will you have enough income to retire comfortably? 

I wish it was a simple question with a simple answer. As they approach retirement a lot of folks begin to play the game of roulette at the casino hoping for that one big break. Does the retirement planning process really need to depend on the roll of the dice? Based on my chats at social gatherings, most people in their 50s regret the way they planned for their retirement.  Almost all feel that they could have done a much better job in building a better corpus. But often the challenge also lies in the asset allocation and the inability to generate periodic income without the need for active management.

The first thing of course is to have an adequate size of a corpus to form the base for your retirement funding. While the active income during your earning years is an important element, the one thing that many fail to do is to start the planning process early. The magic of compounding is almost often elusive to the human mind. The impact of time in the process is often misunderstood or not understood enough. One of the moment important factor in the final result is time. Start early and let the investment grow over time. The magic begins to unfold from year 15 onward and truly feels like magic in year 25 of the process. Given the average retirement age of 60 years, being fully involved and committed to the process by the age of 30 is critical. Starting at the age of 25 gives a strong multiplier impact. 

Buy of Rent

The mix of assets as you draw closer to retirement is extremely important. The asset allocation process becomes even more important as one draws closer to retirement.  This is for 2 reasons.  Risk management and the need to generate income without active management.  

As the rule of thumb suggests, the share of lower risk assets should increase as one draws closer to retirement. As a person nearing retirement or as someone who has recently retirement, it is undesirable to be heavy in higher risk assets like equity.  It is important that one carefully realigns the asset allocation as one draws closer to retirement. Move more into lower risk assets.

The other factor and probably the less obvious is the ability to generate income without active management. Retirement is a well deserved period and one does not want to spend it in actively managing the assets.  As an example, while rent from an investment property is a good way to generate periodic income, do you really want to spend retirement in managing properties? Add to that the potential of litigation and maintenance. One needs to try and move assets across to classes that can generate income without having to actively management the income.

Do you have a good retirement plan in place?  Or are you banking hopes on God?

Check out this video about the magic of compounding