Investing your money doesn’t always require the help of an expensive investment advisor or financial planner — investing sensibly is a lot simpler than most people think. You don’t need smarts! You need discipline and self-control.
Investing is actually stupid-proof if you follow six simple rules:
1. Spend less than you earn.
This is the most important idea. But for many people, it’s the most difficult. You need to save a significant chunk of your income every month so you will have the money you will need in the future to comfortably retire.
If you don’t save enough, no amount of financial tricks will give you the returns you need for a comfortable retirement. How much is enough? Twenty percent of your income is a good number, to begin with.
2. Keep a piggy bank of emergency savings
The first step in building your financial plan is to have an emergency savings account that covers three to six months of your household and living expenses. For some, this can be a difficult goal to achieve. But it’s important to do so. This emergency fund will help you cover unexpected expenses (such as emergency medical bills) without borrowing from your friends or on your credit card and digging yourself into a financial hole.
Start simple – by opening a savings account at a bank with no credit card or fancy features. Try and build your emergency fund as quickly as possible, but don’t worry it if you need a few months. Saving just a little bit at a time is much better than saving nothing.
3. Save regularly, and relentlessly
You must set up a routine for your investing and stick to it. And then – never do anything.
Don’t open your damn statements. Don’t even peek. Just stay in the game – never give up and keep investing – no matter what.
4. Invest your savings in a long-term diversified portfolio
Diversification means spreading out your investments so you don’t put all your eggs in one basket. Your money is invested across different asset classes and industry sectors. This spreads the risk on your investments while at the same time improving the chances of having money invested in the market with higher returns.
The primary goal of diversification is to balance risk and return. A well-diversified portfolio has lower ups and downs and grows steadily over time.
It doesn’t matter what your goal, your time horizon, or your risk tolerance is. A diversified portfolio is the foundation of any smart investment strategy.
5. Keep your investing costs as low as possible
The miracle of compounding returns is a fabulous number. But investors need to worry about the tyranny of compounding costs. Watch costs. Don’t overpay, because costs come out of the returns you get.
When you buy a direct plan of a mutual fund, you eliminate the massive commissions paid to middle-men (your broker, investment adviser, mutual fund distributor or banker). The commission you save each year comes back to you! It is added to your returns, so there’s more for you and your family. That’s why all good investment advisors only recommend Direct Plans to their investors.
6. Sit and wait!
Newspapers, politicians, and pundits have constantly moaned about terrifying problems facing India. But our economic system has worked extraordinarily well in the last thirty years and unleashed human potential of a billion Indians. We’re the luckiest generation of Indians there ever was. If you’re a long-term investor, your one big bet is that the GDP will be significantly larger in 2027 than it is today! Buy the companies that make up Corporate India, and wait.
It really is that simple.