Tag - stocks

February 2010

Purpose of Investments

Purpose of Investments, Wealth Management, Wealth Generation, Accumulation, Distribution, Estate Planning, Tax Planning, Power of compounding.

The world of finance can be intimidating, But as Raplh Waldo Emerson says “Fear always springs from ignorance”. The stock market and so called greater financial world is not complicated once you become aware of the basics of investing and dispel fear of ignorance.

First let us see What is not a Investment? Now, This is fun….

First of all, Investing isn’t a get-rich-quick scheme. (There are other risky, very risky avenues of speculation to get-rich-quick which very often turn to get-poor-quick for people with no discipline and patience. Remember – High Risk , High Return, Less Risk, Less Return) . Investing is not speculation. Investing is not buying stocks on a “Hot Tip”. Always remember a Hot Tip leads to a bottomless Pit.:-). Investing is not following the herd which often leaves the investors high and dry. Investing is not listening to channels to analysts and always clicking on your portfolio to see it (along with your heartbeat) fluctuate on a daily basis. Investment should not be done emotionally (Oh, my uncle’s wife’s son’s friend’s sister wants to sell me a insurance cum investment policy, How can I say No. Well — Learn to say No. There are many things in life where you have to say No. ).  Investment is also not just about returns.

So that brings us to What is a Investment : Well, What does wikipedia have to say : “Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in form of interest, income, or appreciation of the value of the instrument”

Investing is putting your money to work for you in order to generate wealth. Generally Money is earned by income generated for some work done for which we trade our precious time. Problem is: for more money, you have to work more hours and give more time. And time is a limited resource. One way is to make your money work for you and start earning. Quite simply, making your money work for you maximizes your earning potential.

goal_purpose

Again, Investments have to be planned and done with a purpose, a meaning, and should be done to realize goals of life. Investments are not a one-size-fits-all manner and are individual specific, situation specific. Goals like, Retirement , Child Education, Child Marriage, House Purchase in future, Purchasing assets in future, — goals in different times/ stages of life. etc. And so Investment Planning is utmost important. Plan , Plan , Plan and then execute. Look at the big picture and do not miss the forest (long term enrichment goals) for the trees (unplanned short sightedness)

There are many different ways you can go about making an investment. Stocks, Mutual Funds, ETF’s , Money Market Liquid Funds, bank FD’s etc., or real estate , or  starting your own business. It does not matter which method you choose for investing your money. However, the objective is always to put your money to work over long periods of time (5 yrs-10yrs-15yrs+) with adequate margin of safety, and let the magic of compounding take over,  so that it beats inflation and generates wealth and fulfills the purpose and more or less  achieves the goals.

This is the most important concept in investing.