A newbie comes with a lot of enthusiasm and expectations from the market. They might have heard from some of their friends about how they made good money by investing in markets, especially during these times where the market is raging, beating all valuation principles. As a novice investor, one should always keep in mind that someone accumulates actual wealth over a long period. The earlier you start, the better it is. There are instances of people who made quick money from the markets, but what you have not heard is the people who lost their fortunes and got wiped away just because they were seeing the markets as a place to gamble. Let me discuss some ways that you can adopt when you start your journey so that your risk is mitigated and the probability of generating wealth multiplies exponentially.
1. Set your investment goals and start early
You should decide what you want to get out of investing. Obviously, your goal is to create wealth, but everyone’s definition of wealth is different. Must consider your income, capital appreciation, and safety of capital. Also, consider your age, your personal circumstances, and your financial position.
The earlier you invest, the better. The sooner you start, the less money you will need every year to achieve your investing goals. Your earnings will compound over time, so don’t be afraid to invest, even if you are a college student, or anybody who wants to generate wealth.
2. Power of compounding and the role of time
You might have heard a lot about the compounding factor, but the key is to adapt it into your investing habits. Some of the most successful investors of all time will keep on insisting on the value of compounding and the need to stay invested for a longer time.
Let’s say you invest 5000 rupees every month for 10 years and stay invested for 20 years with a compounded annual growth rate of 14%. After 20 years, your investment of 6 lakhs will become 53 lakhs. That’s the power of compounding. Making a slight change into the investment amount can do wonders. Let’s say instead of 5000, you invest 10000, with all other aspects being the same, your 12 lakh investment will grow to an amassing 1.02 crore. This is possible provided that you are able to generate that 14% compounded rate. Which is very much possible.
3. Importance of investing in index funds
Index funds are kind of mutual funds where the underlying asset will be one index. For eg Nifty 50, Bank nifty, etc. So, as a newbie investor, one should always invest periodically in any of these funds. In our previous lesson, we came across the power of compounding, where we have mentioned generating 14% compounded annual growth rate. We can achieve this by investing periodically in these index funds. Any novice can do this easily just by opening a demat account with any of the brokers and start investing periodically.
If you believe in India’s growth prospects from now on, then you must invest in NIFTY 50, which comprises top 50 companies of India. A nation’s growth is directly proportional to how well the companies are doing, which again related to the growing GDP. So investing periodically and systematically in index funds has the potential of generating a good amount of wealth compounded over a long period.
4. Systematic investing gives you the edge
The key here is to invest periodically and systematically over a long period. By doing this, a newbie investor can overcome the difficulties of volatility in markets. Markets won’t go in a single trend always. There will be setbacks, crash, corrections which might make your portfolio loose an enormous amount of wealth, but the key here is to stay invested. And doing this systematically gives you an edge during the crashes, where you can accumulate more units for lesser price which will average out your investment value. It will be a better tactic to invest more when a crash happens. Markets always can come back stronger than what may happen. But being said, the retracement may take years, so that’s where patience and resilience comes into play.
5. Patience is a virtue
Although most of the investors understands the importance of patience, it is difficult to stay calm and take decisions accordingly. Stock market investments are subject to volatility. Shorter the time-period higher the volatility. One has to look into investing from that perspective. It is a long-term journey one shouldn’t bother about the short-term volatility that markets portray.
Sometimes your investments may face extreme drawdowns that your portfolio value may depreciate by even 30-40%. Mostly happens when there are incidents like 2008, COVID-19 crash, etc. As long as your own quality companies, they all will jump back into positive once the broader markets retrieve. As I already mentioned, this may even take a few years. So, are you patient enough to sit through this turmoil? An intelligent investor is one who invests into great quality companies and invests at the right time, holding it for a long period to enjoy the benefits. I consider a crash in the markets to be the best time to get in. But it’s easy said than done.
6. Diversify your investments
Diversification of investments essentially means not putting all eggs in one basket. When you invest, you can do diversification as asset classes for e.g. When you invest in Equities, you can simultaneously start investing in Gold too, which always works as a perfect hedge to your equity investments, and both of the asset classes have given stellar returns in the past. Similarly, inside equities itself you can diversify the investments into different sectors like FMCG, Pharma, Auto, Metal, etc.
This kind of approach will add balance to one’s portfolio. As we have discussed, markets are volatile in shorter time frame, so diversifying your portfolio will help reduce the volatility overall. Better to have non-correlated sectors present in the portfolio so that diversification is proper.
7. Monitor the Portfolio
As an investor, one should monitor their portfolio picks periodically. I must inform one about the information on companies that one holds in their portfolio. When you have great quality companies in your portfolio, things become easier and effective. As a beginner, one must not invest in penny stocks or small-cap stocks, as the risk involved is much higher compared to the blue-chip companies.
As warren buffet says, “Risk comes from not knowing what you are doing”.
Financial literacy is of utmost importance in today’s day and age. One must spend some time on improving all aspects related to this. Being ignorant and staying away from things that really matters will do no good from now on. Stock markets are a place where you actually own a business. Investing in stocks must be in such a way that you take ownership of the company. It should align you with that company’s vision and you are sure about the company’s future prospects, too. So invest in what you know rather than investing randomly.
My mission is to educate most people to be financially free and to learn the art of investing and trading in stock markets.
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Disclaimer
All these are for educational purposes only, and the author doesn’t recommend any shares to invest in. Consult your financial advisor before you take any investment decisions.
