Wishing Merry Christmas and a Happy New Year is the best way to close an eventful year. It is a time to introspect on the year gone by and look forward with optimism at 2019. Year 2018 has been a volatile year for investors with surprises ranging from tax on LTCG, a sharp fall in the rupee, the unnerving fluctuations in the price of oil, the correction in midcaps, and the gradual implosion of IL&FS.
However, in the midst of this chaos, there have been some pearls of financial wisdom that stood out. Let us focus on five such learnings to carry forward into 2019.
1. If you don’t know where to reach, it is unlikely you will get anywhere
This is what a goal-based approach to investing is all about. If you keep investing in equities and bonds at random, it is unlikely that you will get too far in creating wealth. That is why, your investment journey must begin with your goals in mind. Write down your long-term and medium-term goals such as retirement, children’s education, holidays, home loan margin, car loan margin, etc. Once you extrapolate the money needed for these goals, you can work backwards and create a core portfolio. This core portfolio cannot be compromised at any cost.
Take opportunistic bets in your satellite portfolio will most definitely work in your favor!
2. The biggest risk is not taking any risk
Even if you invest Rs10,000 per month consistently for 20 years in a liquid fund, you are unlikely to accumulate anything substantial. A liquid fund will give you 6% annualized return which will work out to 4.50% after taxes. At that rate, it will take 16 years for your money to double. Forget about wealth creation, you cannot even beat inflation; so you must take the risk of equities. Interestingly, over a period of 10-15 years, equities outperform other asset classes with minimal downside risk. When your goals are long-term, you must look at equities as the preferred asset class.
3. A rupee saved is worth more than a rupee spent
Why do we say that? When you spend money, it is gone and so is its future value. Instead, when you save and invest the money in productive assets such as equities, it creates future value. Over the years, not only the principal investment but even the returns generate additional returns. The power of compounding works most effectively in such cases. The core of wealth creation remains extracting maximum savings out of your income.
4. Nobody created wealth with too much debt
Most people don’t realize the dangers of too much debt till they actually walk into a debt trap. Debt not only puts pressure on your cash flows but also reduces your appetite and capacity to take risks. Some debt such as a home loan or car loan is inevitable, but high-cost debt such as credit cards and personal loans are best kept at the bare minimum. The cornerstone of your financial plan must be repaying high-cost debt first.
5. Don’t worry about factors you cannot control
It is so natural for us to worry about whether the BJP will return to power in 2019 or whether the Fed will hike rates in the coming year. The fact is that you don’t have control over either. As an investor, your focus must be able to look at existing risks and manage them. Most triggers are extraneous and out of your control. What is in your control is stock selection and your portfolio mix.
May you have a financially rewarding year with these tips!