You can see so many youngsters quoting various thumb rules while making their investments. Though this may not be completely wrong, a placid take on investing money this way may not yield the desired results. Many websites advise new investors to bet on equities equal to 100 minus their age. This means that 30-year-old investors looking to invest in the market must park 70 per cent of their earnings in equities. But, does adhering to this standard formula work for all?
The answer is a blatant “No” considering how investments depend on financial goals, responsibilities and the immediate availability of money. Not all are blessed with the same salary package nor are burdened with an equal share of responsibilities. Apart, the rules have changed with the marriageable age getting pushed further in some societies while in others men are betrothed by the time they turn 25 years old. This puts to rest the dependence on standard formulae and theorems for investing.
To understand how mindlessly following the thumb rules of investing may numb your entire financial journey, let us look at the following example.
Suppose, “A” gets married by the age of 27 and has a daughter at 29. This man is the sole breadwinner of his family, which means that he must allocate enough to pay for the family’s essential expenses, set aside more money in an emergency fund, pay premiums towards the life insurance policy he may have bought and ensure some savings in some child plan. Only then, he can care to invest in equities. Expecting him to pump 70 per cent of his monthly salary into equities would be too far-fetched.
“A” is also saving enough for his child’s education, which means that he cannot rush deep into equities sans the risk of seeing his portfolio in red following a sudden market crash. School fees are rising, which means that he may need more money to pay for his child’s education in the coming five years. He must arrange and allocate his money in a way that he does not fall short of it while paying for his ward’s college/university education.
Now, his friend “B” is unmarried and lives with his family. Other than his salary, his family receives an additional pension scheme, thus, relieving him of certain household expenses. Add to it the fact that he lives in his own house, thus, saving him from the pain of paying rent too. He can surely afford to put 70 per cent of his money into equities and utilise the remaining amount to pay for debt funds apart from setting up an emergency corpus.
“B” with no responsibilities to bind him for the coming years can take risks by investing money in equities. This he can do by putting some money in large-cap funds while putting a larger chunk of his salary in small-cap, mid-cap and thematic funds. To mitigate the risk and avail of tax benefits, he can also put some money up to ₹1,50,000 every year in the Public Provident Fund (PPF). With appraisals and bonuses received every year, “B” can also think of stepping up his investments gradually or moving to some alternative investments like gold. Investments in gold will ensure that he has hedged his investments against the dampening effect of inflation.
Following rules blindly?
It is good to have a law or rule in place for you to follow. But remember that rules are for people; people are not for rules, which means that you must use your discretion while following one. Many personal finance experts harp on the idea of deciding your funds’ allocation based on certain thumb rules.
No two persons have the same needs. No two persons think alike about finance. Then, how can two persons have the same portfolio? It is good to follow portfolio ideas shared by experts, but aping them to escape the efforts and boredom of chalking out your own portfolio will do you no good. In fact, it will not serve you any purpose because you will not have the money when you need it the most or maybe you will never be able to accumulate enough money for your future.
Again, the definition of “enough money” relies on ambiguity and has no set definition. What may be enough for you may not be enough for your friends or peers.
So, decide your financial goals first. Divide them into timelines to ensure that you save and invest accordingly. And then, come up with an investing formula that works exclusively for you. Know the “thumb rules”, but do not fall for them blindly.
When it comes to money, “To each, his own” is the mantra that underlines every investment decision.