Saving money is good, investing money is better, and investing money with a plan in place is the best. In this section, we will look at the basics of financial planning for the future, how to design an investment plan using various asset types that are available for investments, and how to monitor the investments. While this is a very vast topic, we will try to introduce some of the basic concepts in this section to get you going in this direction.
How to plan for a secure financial future
Planning is crucial as none of us plan to fail but most of us fail to plan. Thus, once we have assessed our financial status we can proceed to the next step of building a financial plan to achieve our goals. Otherwise most of our goals would be distant dreams.
Clear measurable goals
To retire at 50 with Rs 1 Crore is clear and measurable than "to retire early with lots of money" which is vague and distant.
Co-related financial decisions
There is no isolated financial decision as each financial decision affects other goals and overall plan. An early retirement decision may mean that you may have to postpone buying a car or shifting to a smaller home. Bearing this in our mind frees us from wanting to achieve all goals rather than the goals that really matter.
Being realistic
Remember that our financial situation is unique and brought about by our own set of circumstance. Hence being realistic helps a lot. For example, you can afford a house that is around three years your average take home salary. So it is not possible for you to buy a posh bungalow unless it costs around three times your annual income. The biggest threat to achieving our goals is being unrealistic both in setting goals and in pursuing it.
Designing an investment portfolio
We provide an online investment platform, and we offer free advisory services. One of the most frequent advisory questions that we get from our investors is typically this - "I can save x thousand dollars every month. I would like to invest in FD. Please suggest some funds for me".
Bonds are generally less volatile than stocks but offer more modest returns. As a result, an investor approaching a financial goal might increase his or her bond holdings relative to his or her stock holdings because the reduced risk of holding more bonds would be attractive to the investor despite their lower potential for growth.
You should keep in mind that certain categories of bonds offer high returns similar to stocks. But these bonds, known as high-yield or junk bonds, also carry higher risk.
The practice of spreading money among different investments to reduce risk is known as diversification. By picking the right group of investments, you may be able to limit your losses and
Primer on asset classes
Even if you are new to investing, you may already know some of the most fundamental principles of sound investing. How did you learn them? Through ordinary, real-life experiences that have nothing to do with the stock market. For example, have you ever noticed that street vendors often sell seemingly unrelated products - such as umbrellas and sunglasses? Initially, that may seem odd.
Tirne Horizon
Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets. By contrast, an investor saving up for a teenager's college education would likely take on less risk because he or she has a shorter time horizon.
Risk Tolerance
Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low-risk tolerance, tends to favor investments that will preserve his or her original investment. In the words of the famous saying, conservative investors keep a "bird in the hand", while aggressive investors seek "two in the bush".