Investing tip: Don’t forget the learnings from your mistakes

Investing is an endless journey that continues lifelong. Smart investing generates additional income that helps an individual to overcome the effects of rising inflation and provides incremental cash flow from investment that could fund additional expenses.

With so much happening globally that impacts finances and financial markets, it is imperative for investors to take a breath, evaluate the past and plan for the investing journey ahead. Though past performance is not a guarantee for assured returns in future, earning through analysis and learnings from the past would certainly lead to positive outcomes. At this crucial juncture, these learnings may come handy for investors:

Consider investment income as secondary income, rather than the primary source of income

Income from investments is not a primary source of income for investors. Income from trading is a primary source of income for professional traders, who are qualified and experienced in placing trades in a live market. The level of proficiency expected from professional traders can only be attained through education, professional experience and training. Simply imitating them is not an option to generate income. Income from investment is realised after careful and considerate approach to investments. This journey requires patience and utmost care and adequate learning.

SIP vs EMI

Given an option, Systematic Investment Plan (SIP) gets priority over Equated Monthly Installment (EMI) payable on loan(s) availed for purchase of a house or any other asset or any other purpose. Investment comes first compared to debt. Once a reasonable corpus has been accumulated, an investor may endeavour to take the next leap and sign up for debt. Contrary to this benchmark practice, investors start lining up debt at the inception of their earning and investment journey and miss the chance of building and accumulating wealth. Availing a loan is just another way to sell future earnings to fund present requirements that may not be an ideal option.

Living expenses vs Lifestyle expenses

Shape up lifestyle that is affordable while keeping a check on living expenses. Investment income can fund lifestyle expenses and not living expenses. Investors need to understand the difference between the two types of expenses. Rely on investment income to fund lifestyle expenses, provided these investments are placed to generate income at periodic intervals. Corpus accumulated over time or savings should not be utilised to fund lifestyle expenses. Living expenses should ideally be funded through the occupation that the investor is engaged in. Occupation or profession is the prime source of recurring income.

Financial plan to financial pain

An absence of financial plan leads to financial pain. Every individual needs to have a clear financial plan that envisages expenditure to be incurred over the years and projected sources of income to fund this expenditure. Any gaps or deficit that is envisaged will assist in curtailing non-priority expenditure to minimise this deficit. Debts should not be opted to fund deficit, rather, expenditure should be curtailed to match cash flow. Lack of financial planning today is a sure recipe for financial pain tomorrow.

Asset light & investment heavy vs Investment light and asset heavy

There is an absolute difference between the two. Asset light is ideal that would leave room for investments to accumulate wealth over the years. Buying assets be it out of desire or out of compulsion because others are buying or the offers are too lucrative would lead to undue stress on cash flows and open doors for unwarranted debt that would eat away all prospects for savings and ultimately dilute potential for wealth accumulation. Investors need to be extremely cautious before making a decision to buy and build asset base.

Being a small investor, buy large caps rather than buying small caps like the large investor

An investment journey for an individual starts with a small step. In the initial phase of this journey, risk appetite is less. Equities are a risky asset. Within equities as an asset class, there are large cap stocks (having a substantially high market capitalisation), mid-cap stocks and small cap stocks (having lesser market capitalisation). Large cap stocks tend to be less volatile in comparison to mid-cap stocks and small cap stocks. For a beginner who is at the initial stages of the investment journey, large cap stocks are a better choice.

(Dhaval Jasani is CEO of ZTI Global).