Wealth is rarely built through dramatic trades. It accumulates through consistent saving, sensible allocation and the ability to stay invested through uncomfortable periods. Observing the long history of the INDEXDJX DJI, for example, reveals repeated recoveries after severe declines, a reminder that patient capital has often been rewarded. Studying the KOSPI shows how an economy’s focus on innovation and industrial upgrading can drive decades of equity growth despite sharp interim setbacks. These lessons translate well to Indian investors planning for retirement, education and financial independence.
The Power of Compounding
Compounding means earning returns on the returns earned and the magic of compounding helps grow your corpus manifold over long periods of time. A regular monthly investment of a small amount made over a period of twenty-five years at a moderate rate of return would have grown many times its size, giving you a corpus much larger than the sum of all your investments.
The key lies in time. The earlier you start, the more you benefit from compounding. That is why a systematic investment plan in mutual funds is a good idea. You do not need to time the market; you simply keep investing regularly with a predetermined amount.
Surviving Drawdowns
Markets always have their ups and downs. Some of them have seen a crash of a third or more in a given year. Investors who sold off at the bottom of the market have been able to beat those who held on to their shares over time. Many studies have revealed that psychology plays the biggest role in a market participant’s success.
You should prepare yourself for such market conditions by setting aside a sum of money in liquid assets for a period of six to twelve months. Do not keep a majority of your corpus in equities if you cannot bear the risk of a market crash. Similarly, your exposure to equities should increase as you near retirement in order to protect your earnings. Likewise, a mix of bank deposits and Public Provident Fund can help reduce risk.
Asset Allocation Over the Life Cycle
As you move towards retirement, you would want to change the asset allocation depending on your needs.
A younger person should consider a higher allocation to equities as compared to someone nearing retirement who would be well-advised to invest more in debt instruments such as bank deposits and fixed deposits. Different financial goals would require different allocations to different funds. For example, a sum required in two years should not be invested in equities as compared to a similar sum required in twenty years. Tax-saving instruments such as Employees’ Provident Fund and National Pension System can be used to park your money.
Costs, Taxes and Discipline
Just as you benefit from a rupee saved, you lose out on a rupee spent. Costs are important, and you should look for ways to reduce them, for example, by investing in a direct plan or an index fund. Taxes on profits and dividends should be borne in mind when you withdraw your money. Similarly, avoid trading frequently as it will only increase costs and eat into your profits. Instead, increase the amount you contribute to your portfolio periodically and invest windfalls such as bonuses into your financial goals.
Global awareness is always beneficial as it provides you with insight into how the markets work. Markets have witnessed wars, pandemics, rises and falls of economies and the emergence of new technologies and markets have always rewarded the patient investor. However, it must be stated that this has not been an exception so far. It must be borne in mind while you invest. You can focus on aspects that you can control, for example, by increasing the amount saved towards your financial goals, reducing costs and diversifying your investments
