After a 298-day transit on September 24, 2014, the Indians completed the interplanetary mission to reach Mars. Physics is a precision science governed by laws and principles.
Unfortunately, investments and asset price movements do not follow these laws. Asset prices do not follow Newton's law of motion nor are they based on Archimedes' principle. Asset prices move according to the laws of the narratives. It is almost impossible to predict the direction of these narratives.
The most important principle of investing is that no one should fool themselves. Unfortunately, we deceive ourselves on a daily basis and therefore are under constant pressure to achieve our financial goals. So instead of focusing on the short-term narrative, the focus should be on the long-term trends of the asset class.
As the markets are hitting new highs, everyone is looking for the next hot stocks. Hot stocks can make you rich, but they probably won't. In the long run, while the stock market, in general, will perform well, most individual stocks may not. Not all companies can be Apple, Google, Amazon, Facebook, or Tesla. Also, in India, not all companies can be TCS, Bajaj Finance, Asian Paints, or HDFC Bank. Therefore, owning a well-diversified portfolio using mutual funds and buying broad-based simple index funds is the best way to reduce risk.
Today, many investors are also fortunate to achieve high returns by investing in IPOs, buying stock advice, and investing in stocks with half-completed knowledge and information. Warren Buffett puts it very well when he says, "Only when the tide goes out can you tell who has been swimming naked."
In a bull market, everyone begins to believe that they have skills like Warren Buffet and that they can easily outperform the market. Investing and valuation is a science that requires a deep dive into the company's balance sheet, management, and cash flow data, and based on this assessment, to arrive at a fair price. You have to do enough research before investing or outsourcing your investment in mutual funds.
By nature, we don't like facts and data, but we love stories. Listening and sharing stories is part of our DNA. Our brain is a machine for making stories and our imagination can explain everything. The future is uncertain and uncertainty brings with it a great deal of anxiety. Stories help us understand a random world and help reduce our anxiety. No wonder fortune-telling is a huge industry.
The only story that applies to the stock market is that it always fluctuates and at the same time has the potential to create wealth - that is, to beat inflation over a long period of time. Fixed income helps preserve capital by offering returns that are in line with inflation. Gold is a good way to protect yourself from inflation and uncertainty.
Money is an emotional issue. It brings us anxiety, stress, insecurity, confidence, happiness, and many other emotions. We act normally under normal circumstances and only show our true color in times of extreme stress. It is important to consider extreme scenarios when creating the portfolio. We are all genetically programmed differently from childbirth and have unique behavior. Our insecurities are also unique, based on our upbringing and our life circumstances. Everyone has different aspirations and a unique vision of looking at money. One should have an asset allocation that is also unique and matches their internal scorecard.
Behavioral science says that it is very difficult to think beyond ten years. The most difficult question to answer in an interview is the answer: "Where do you see yourself in five years?" Retirement seems like a distant goal and is the final element of financial planning. Working life is short and deaths are only increasing in India. Most of us will have a minimum retirement age of 20 years. A good financial plan begins with planning for retirement.
Archimedes brought this concept of leverage about 2000 years ago. He said, "Give me a long enough lever and I'll lift the ground." Leverage accomplishes much more than the power you put in. The lever here is to create enormous wealth on time. Money accumulates exponentially over time. The reason so many smart people make big financial mistakes is because they think that leverage is IQ and ignore time.
It's good to save for things like buying a car, a house, children's education, marriage, and retirement. But saving has to be an ingrained habit even without any goal. It is not known when the family will ask for the money. Most of us find it difficult to save and invest. We are all influenced by the behavior of the people around us. The company of people who play the lifestyle game will make us spend more. Choosing the right impact circle is a smart trick to being a good saver and investor.
Friction is the force that must be overcome to achieve a result. The best way to save and invest in automation. SIP is the best automatic way to reduce friction between saving and investing intention and ultimate action. You can also use STP (Systematic Transfer Plan) automation to invest from debt to equity if you are unsure of the markets and want to invest gradually. SWP (Systematic Withdrawal Plan) is a very effective way to withdraw money if you are planning your retirement. Automate your invoices and your investments.
Catalysts are the unknown champions of a chemical reaction. It increases the speed of the chemical reaction and the best part is that it is not consumed in the chemical reaction. The catalyst can be removed and reused. Having an emergency fund in your wallet acts as a catalyst. Having a proper safety net in your portfolio gives you enough confidence to take risks in your profession and business and when investing in stocks.
There is nothing to fear when investing, you just have to understand it. In 2008, the markets corrected by more than 50%, and from the peak of 2008 to 2014, the markets offered almost no returns. You have a lazy strategy, think decades, not years. Investing Approach in 2021: Expect the best, own stocks, but also be prepared for the worst and have a stable income, gold, and contingency funds in your portfolio.
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