Long term Investing and building wealth

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When you invest for long-term financial goals, you refrain from timing the market and making impulsive investment decisions

THE decisions that we make today will shape our tomorrow. While managing your money, there are certain golden rules that you can follow. This will help you gain better control of your finances and in turn, help you lead a financially secure life. Here are the tried and tested investing mantras for you.

Invest early: Did you know that Warren Buffett, the world's richest man, started investing at the age of 11? And guess what? He regrets that he began late.

Let's take the case of two friends -Ram and Shyam. Ram puts away Rs 750 every year from the age of 15 and for a period of 15 years. After this, he discontinues any further investments.

While at the same time, Shyam begins investing Rs 5,000 every year from the age of 30 and invest this amount for the next 30 years. Let's assume that their investments fetch them a 15 per cent annual return. Who do you think would have made more wealth at the retirement age of 60? No, it's not Shyam as most of you would think! Yes, it is Ram. Even a modest amount of Rs 750 he invested will snowball to Rs 27.70 lakh by the time he turns 60, whereas, Shyam's Rs 5,000 investment every year will fetch him a little less, that is, Rs 25 lakh.

Both of them managed to build almost an equal amount of wealth. However, did you no tice that it took Shyam Rs 4,250 more every month and an investment period double than that of Ram to build wealth almost similar to his.

Benefit from the power of compounding:

"The most powerful force of the universe is compound interest" -Albert Einstein. He couldn't have been more correct. Simply put, compounding means earning money on the already earned. Confusing? In fact, it is a very simple concept which, when put to use, can give you extraordinary returns over the long term.

Invest for the long-term:

Investing does not end at starting out early and compounding returns. It is equally important to focus on the long-term.

When it comes to risky investment avenues such as stocks and mutual funds, a long-term approach pays, since it irons out market volatility. Besides, when you invest for long-term financial goals, you refrain from timing the market and making impulsive investment decisions.

Think systematically:

We often postpone investing if we feel we don't have enough money or time to invest. With systematic investments, you can make even small contributions (as much as Rs 500) and yet generate enough wealth over the long-term.

And don't forget  the power of com pounding is at work even with small amounts as we have seen earlier.

Invest consistently in a disciplined way:

One of the cornerstones of effective wealth building is to invest at a onsistent pace. Take the case of two friends -Luv and Kush. Both started investing Rs 3,000 a year at the age of 25 and continued to invest till hey were 30 years old. After hat, while Luv continued to nvest Rs 3,000, Kush kept procrastinating and discontinued his regular investment.

After some years, Kush, realizing his folly, quickly made lump sum investments (Rs 20,000 when he was 35 and another Rs 25,000 when he was 42).

By the age of 45, both Luv and Kush had invested Rs 63,000 each. Assuming a growth rate of 15 per cent per annum for both of them, Luv had made Rs 4 lakh, while Kush had built up only Rs 3.8 lakh.

Diversify your investments and spread risk:

Each asset class has a unique degree of risk that accompanies it and different returns generated by it. Even at a certain given point of time, a particular investment might experience a growth in its value, while another investment might face a decline and downfall.

Keeping your portfolio concentrated on just one or two assets can lead to an imbalance.

The primary aim of spreading your money among various asset classes is to maximise returns for your preferred level of risk, or put in another way, to minimize risk for a certain expected rate of return. This is known as diversification.

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