How to Choose the Right Investment Strategies for Beginners

Beginners who are thinking of investment or about to start their investment journey should first understand the importance of investment strategies. Cash Flow is needed to sustain your lifestyle. The income you earn today helps with your cash flow. Investment is what you pay today to nurture the tomorrow when the current cash flow stops. In short, investment is a way to fund your future while sacrificing some part of your present.

Income does not need to be equal to expense. You can choose to spend the salary you earn today or use it to fund your tomorrow while living a comfortable life today. This is a difficult choice one needs to make. There is an element of 'Delayed Gratification' in it. It is difficult for young salaried individuals to appreciate and understand the concept of delayed gratification.

'Marshmallow experiment' explains the concept of delayed gratification beautifully.

Investing for Beginners: A Step-by-Step Guide

As you see, humans are not designed for delaying the gratification. Most would want to have it today and immediately and sacrifice is a remote concept. If you do not sacrifice some part of your today to fund your tomorrow, you may have to continue to work forever to fund your lifestyle. The system is designed for you to work forever to earn your living.

A smart individual would learn delayed gratification to fund their future. Once you understand this concept well, you are ready to start your investing journey.

If this is difficult to practice, here are some basics you can try:

1. Force savings

There are disciplined approaches like SIP in Mutual Funds which are known wealth creators. Once you start earning, allocate some part of it for investment irrespective of your expense. So, Income-Savings= Expense instead of Income-Expense = Savings. This is a simple, yet powerful strategy which can help you increase your savings.

2. Avoid Complicating

Most individuals spend too much time thinking where to invest. The financial world is complicated by design to keep investors confused. It is your job to de-clutter it and think straight.

3. Do not over-diversify

Some are confused and not sure about any investment and end up over-diversifying. You don't need to pick 10 different mutual funds. Just pick 1-3 good funds and more or less they will generate similar returns.

4. Track your expenses

Sometimes, people don't know how much they are spending. You should have clarity of your income, expenses and your savings goal. One of the best investment strategies is to keep it documented. There are software available to help you with it.

5. Think before making discretionary expenses

Yes, you have a solid cash flow today and you can afford it. But, do you buy just because you can afford it? Think, if you are buying something because of a psychological pressure? Many times, it is FOMO or peer pressure which make us get into discretionary expenses. Avoid using your future cash flow to fund your present by taking a loan for any discretionary expense. Debt is a very bad trap and one should avoid getting into it at all cost.

6. Be open about money problems in family

Never hide your financial status with each other if you are married. As a family, if you brain storm investing, you may find a better approach towards it. Never hide your status with your spouse. If you are not doing well, call it out and reach out to each other for support with managing expenses. Many times, people do not tell the truth to their spouse and they don't have a clarity on Financial challenges. In the end, you suffer as a family.

Why Start Investing Early

Warren Buffet is a great investor and has made lots of money in his life. Do you know he started investing as a teenager? He loved the art and mastered it. However, he managed to get big only in his early 50s. He is this big because he managed to live long. Most of us may not out-live him or become as great as him because of our limitation in terms of tenure of spending. If we do not start early, we are missing on the compounding factor.

To understand compounding, simply understand the 'Rule of 72'. Money doubles every (72/rate of return) number of years. So, if you earn at 8% rate, you will double your money in 9 years and at 9%, it will be 8 years and so on. For you to start compounding your wealth, you should have a good base which you can compound. If you do not start early, chances are your wealth creation journey will get delayed.

So, you should start early to enjoy the compounding journey.

Low-Risk Strategies

One should always be prepared for emergency. Once you start your investing journey, you will realize that returns are proportional to risk taken. There are some emergency funds you should always have before you can move to risky strategies. This emergency fund should be invested in Low-Risk assets.

Some Low-Risk assets include Fixed deposits, Government Bonds, Liquid funds etc. there are various debt based Mutual Funds which are relatively low risk and useful. The low risk strategy should be deployed when you are trying to do a goal-based investment.

Let's say, you want to enroll yourself for a course for which you will need some fund in 2 years. You cannot fund this via an Equity Mutual fund because you don't know where the markets will be when you need the money in 2 years time. Hence, low-risk strategies are needed in such situation. Simply, look for an FD or a Debt based mutual fund which will ensure liquidity because you can sell it any time you like and also give you reasonable return with minimized risk.

So, depending on your goal, you will need Low-risk strategies also along with investment in high risk assets.

Building a Balanced Portfolio

This is not an easy game and you should talk to a Financial Adviser to get your portfolio reviewed. An overall assessment of your assets/liabilities and cash flow will help a Financial Adviser guide you in making right and balanced approach towards investment.

Investment strategies: Common Beginner Mistakes

1. Over-thinking. Investing is easy and simple. The financial media and influencers are responsible in making you think it is complex. A simple Mutual Fund which gives you 10-12% returns is enough. Just stay invested and do not think much about loss. Loss aversion is a key human trait which makes us risk-averse and eternally confused individuals. There is no risk in this world that is not worth taking. Just do it, chances are you will succeed. If you are cluttered, consult a Financial Adviser like you go to a doctor when you are suffering.

2. Insurance trap. Understand different insurance products and see what you need. A 25 year old with no dependents, does not need a term insurance. But, they do need a health insurance. Similarly, a 40 year old will need to make sure they have sufficient insurance for the entire family. These are minor mistakes which can create bigger problems for future while choosing your investment strategies. Also, do not buy endowment plans. Never mix insurance with investment. Keep them separate and simple.

3. Investing in Equity to meet short term goals: Equity is never a short term asset. Equity assets should ideally be never touch kind of money. But, people juggle with it to meet short term goals. For short term, look for low-risk debt funds.

4. Investing in stocks based on tips from Friends/Relatives: This is wastage of time and money. Unless you are seriously looking to understand stocks and investment, do not waste your time in this. Buy stocks via Mutual Funds. This will give you peace of mind along with wealth creation.

5. Delaying investing and increasing your expenses: Since, as a beginner the amount is low, you tend to think if it is of any value. All big things start small. Never stop small savings. Remember, you are delaying compounding if you delay investing. Make yourself a promise to increase your savings with every rise in salary. Generally, people focus on meeting short term goals and delay starting the investment plan. This is a dangerous trap and should be avoided at all costs.

Unless you realize the importance of investment in your life, you will never appreciate the strategies enough. So, it is crucial to know that the cash flow of today is sufficient to fund your today's needs. But, tomorrow when it stops or a big expense comes for which your salary is not enough, you need to plan in advance. You need proper investment strategies which are based on data combined with research to achieve your goals, be it short-term or long-term.