TENSING RODRIGUES gives guidelines to take better investment decisions.
Should a common investor bet her savings on equity shares? I know,that question is as dicey as the equity investment itself! I have had many occasions when I have been faced with that question, and had to respond to it and to be contradicted; but I cannot still find the perfect answer to it. For it does not have one! Like anything else, there are two sides to it; perhaps more than two. So this is a humble attempt to give the topic a sincere pradakshinna, with a hope that it will help some aam investor to take a better investment decision.
To start with, who is an aam investor? It would be wrong to give a number definition like, say, one whose income is between X and Y. I would rather put it this way: an aam investor is one who saves and invests to meet her basic goals in life. So, I would keep out those who invest because they do not know what else to do with their unspent income; also I would exclude those who invest to create wealth for their next twenty five generations.I would definitely keep out those who can hardly save after paying for their daily bread. I suppose that gives you a fairly workable definition of an aam investor. Now the investment. As I said, an aam investor is one who saves and invests to meet her basic goals in life. The basic investment goals are four: to provide for the future planned requirements like children’s education; to provide for unforeseen emergencies; to provide for their own old age; and,to provide for a modest improvement in quality of life.
Remember, this is a gamble. Invest by supposing that you have lost the money. Do not ever regret losing it. Toss the Coin: if you win, you win big; if you lose, you lose the coin. But tailor this game to your own Temperament. Do not play someone else’s game.
Now the investment that would suit each of these goals is likely to have different attributes. If we consider that any investment has three basic attributes – return, risk and liquidity, then the investment suitable for each of the goals needs to have a different return-risk-liquidity profile.
Investment for planned future expenses needs to yield a modest return with corresponding risk, but need not be very liquid. A high return investment would make it possible for you to create a large corpus for future in a short time; but that would entail a high risk. Obviously you are not going to let your children’s future depend on the ebbs and tides of the security market. You can compromise on liquidity here as these needs are not likely to arise out of the blues – you know more or less when your daughter is likely finish her school, and so on.
The investment to provide for unforeseen emergencies too requires a similar profile investment, except for liquidity. Unforeseen means you cannot know when the need may arise. The third is investing for your own old age. Here, you know the quantum of needs and the time horizon with a fair certainty. So, again, modest return, modest risk investment with low liquidity would be suitable. Also here you have time in your favour – you can plan your investment over a long horizon. Say, you begin earning at age thirty and expect to be back in the pavilion by sixty; then you have an ample time to nurture your investment for a bountiful harvest.
Last is your ‘dream’ – to move up the income scale. You may not move up the job scale as you would like to. But you can definitely create a second income from your investment, which gives you an opportunity to enjoy a better quality of life: a house with a garden, a car in place of a bike, an occasional foreign jaunt. It is here that your investment can take the leap – risk I mean. For this is not a life n death situation; this is a dream.If it turns into reality,fine;if it does not, just a wake up!
Now, where does stock investment feature? I believe that equity shares can be part of all these categories of investment, except for the second: providing for the unforeseen emergencies.Investing for foreseen future expenses can include equity investment if your horizon is more than five years – longer the horizon (that is earlier that you start investing), greater can be the equity component. But if your horizon is less than five years, equity will be strict taboo.
Let us suppose your child is two, you will need the money probably when she turns seventeen. So you have clear fifteen years to grow your kitty. In such a horizon, equity can definitely deliver you decent returns – in excess of 15%, I would say, close to 20%. At 15%, your investment doubles in about five years; so, in fifteen years, 100 turns into 800. But do not go all out for equity. I would suggest, for the first five years keep it at ¾ equity,for the next five years at ½ equity, and for the last five years at ¼ equity. Also do not be over-aggressive in choosing stocks; pick well established companies, delivering steady profits.
The same logic works for your pension corpus: moderate return with moderate risk, and low liquidity. But here you have a log horizon – almost double; so you can really let the time work wonders for you. You can start with 100% equity (first five years) and slowly taper off to 0% (last five years). But here do not be over-aggressive in choosing stocks; stock market kicks are not for the aam investor; except in small doses: that is for the last category of investment.
In this last category – providing for the dream – you can let your urge free. Remember, this is a gamble. Invest by supposing that you have lost the money. Do not ever regret losing it.Toss the coin:if you win, you win big;if you lose, you lose the coin. But tailor this game to your own temperament. Do not play someone else’s game.