Steps to Turn Your Investment Goals into Reality: One of the most important things to do before you start investing is defining your investment goal.
An investment goal is a realistic expectation to meet the returns by investing predefined money for a fixed time frame. The keywords here are ‘realistic expectations’ and ‘timeframe’.
In this post, we are going to discuss three important points/steps that will help you to turn your investment goals into reality. Further, please read this post till the end as there is a bonus in the last section:
3 Steps to Turn Your Investment Goals into Reality
1. Set a realistic goal for your investment
You are interested in investing in stocks. Great! However, if you are planning to invest Rs 50,000 in the market and turn it into Rs 100,000 with 6 months, then please stop there.
Historically speaking, stocks have given better returns than savings, bonds, FDs, gold etc, however, expecting to double your investment amount in 6 months is more like gambling.
While defining your investment goal, set a realistic expectation. An average annual return of 10-15% is amazing if you compare it with a 3.5% interest return on savings. Further, if you are investing intelligently, you can easily beat the market and get better returns.
(Sensex 5 Year Returns [April 2016-21])
Nevertheless, setting unrealistic goals will force you to take ‘unnecessary’ risks in order to achieve that target. These risks can adversely affect your portfolio and even might not be achieved.
That’s why it’s really important that you set a realistically ‘achievable’ goal for your investment.
2. Understand that it’s difficult to make a living by just investing
Honestly, not many people can make a living by investing alone. Why? Let me explain.
In India, for an average family, the yearly income is 10 lakhs.
As we discussed in the first point, the average annual return for the market is 10%. In order to get a return of 10 lakh in a year with a return rate of 10%, you will need to invest a huge amount of INR 1 crore.
Even if you are getting an aggressive return of 20% per annum, still you will need an initial investment of Rs 50 lakhs for making a livelihood.
Frankly speaking, not many people have this much amount of money to invest, especially, if you are in your 20s and recently started your career. That’s why people who are involved full-time in the market choose ‘trading’ as a profession where they can get the benefits of leveraging.
In short, if you have this huge amount of money, then great. You can start your journey as a full-time investor. On the other hand, if you do not have so much money, then you need to find out other sources of income.
NOTE: Even the legendary Investor Warren Buffett worked as a ‘fund manager’ at the beginning of his career. He wasn’t just a full-time investor in the major half of his journey. Warren Buffett gathered a big amount to buy ‘Berkshire Hathaway’s share by working as a fund manager (not an individual investor).
3. Avoid losses on your investment
While investing, it’s equally important to avoid loss than to make profits. Moreover, personally, I believe that avoiding loss is even more important.
Even Warren Buffett considers the same. Here’s a quote from him regarding the importance to avoid loss.
“Rule #1- Don’t lose money. Rule #2- Don’t forget rule #1.”
Why is avoiding loss is so much important in investing?
Let me explain this with the help of an example. Suppose there are two investors- A and B.
Investor A gets a consistent return of 15% per annum for 10 consecutive years.
On the other hand, Investor B gets a return of 18% per annum for 10 consecutive years. However, in between these 10 years, once he got a negative return of 15% in his 8th year.
Who do you think will get better returns after the end of 10 years? Investor A or B?
The answer is investor A. Here is a detailed analysis of the returns gained by both these investors:
|Year||Investor A||Investor B|
|(15% pa)||(18% pa, Loss in 8th Year)|
Although Investor B consistently beat investor A for 9 years with a 3% margin, however for the long run, Investor A outperforms investor B.
Investor A gets more returns than investor B at+ the end of the 10th year.
An important lesson to learn here is that consistent compounding with ‘no loss’ adds more money. The loss interrupts the compounding process.
Another important point to discuss here is that the loss is much harder to earn back.
For example, Suppose you invested Rs 1,000 in stock and lost Rs 500. Here, the incurred loss is 50%. However, in order to get back your initial investment amount, you have to earn Rs 500 now by investing the remaining Rs 500. Overall, a return of 100% is required to cancel the loss of 50%.
Rs 1000 —> Rs 500 —> -50% (loss)
For Rs 500 —> Rs 1000 —> +100% (profit)
In short, although you lost just 50% of your investment amount, however, you have to earn a profit of 100% in order to break even. This is due because earning back is much harder than ensuring a loss.
To conclude, try ‘not to lose a large amount of money by following foolish investing approaches. It’s really difficult to earn back the same money.
Here is the list of a few great personal finance books that can help you to define your investment goal and achieve success:
- The Wealthy Barber by David Chilton
- I will teach you to be rich by Ramit Sethi
- The Millionaire Next Door Thomas Stanley
Here are the key takeaways from this post that will help you to turn your investment goals into reality:
- Set a realistic expectation for your investment. Otherwise, it will force you to take unnecessary risks.
- Understand that making a living just by investing is difficult.
- Avoid losses on your investment. Loss interrupts the compounding process and earning back is much harder than ensuring a loss
That’s all. I hope this post is useful to you. If you have any doubts or need any help, please comment below.
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