My first advice for young investors would be to think long term. These days everybody is looking for making quick money, which means that the possibility of losing money is also very high. Therefore, don’t press the panic button, don’t trade on rumours, be patient and give time for your investments to grow.
One of the benefits of investing early or as soon as one starts working is that one can plan for important events in life. These would typically include children’s education, buying a car, house etc. And since a young person normally does not have many liabilities or dependents at this stage, early and prudent investments would mean that they would achieve their long-term goals through the benefits of compounding. Moreover savings made when you are single go a long way in mitigating the effects of increased cost of living after marriage.
Equity in the past has proved to be the best asset class in terms of returns. The average return for the 12-year period of BSE Index remains at 18 per cent (annualised). So, it is not timing but the time in the market that is important. The Systematic Investment Plan (SIP) route is a simple and fruitful way of increasing exposure in the equity markets.
Secondly, take informed and well-evaluated decisions based on proper research. Typically when you're a young investor, it's best to keep investments simple. Investing in individual stocks can run you through the full experience of investing in securities but that should only be done when you have researched properly or/and have consulted your financial advisor. Index funds and mutual funds provide your portfolio with instant diversification, which is great if you're investing solely for growth. A good strategy could be to let the fund manager invest your money for you. This step might actually get you better returns.
Third, your equity and debt allocation should be based on goals and risk appetite. You should neither be over-exposed to equity nor under-exposed. The amount of equity exposure to be maintained should be decided on the basis of the objective of investment, time horizon and risk appetite. So, if a young investor is looking to invest for the long term and has enough liquidity for his short-term goals, then his equity exposure could go up to 70-80 per cent. But, generally, it is observed that young investors have immediate goals such as house purchase, car purchase, etc. and their earnings are under pressure to achieve all these goals. Therefore they redeem their investments early. So, in general, equity exposure in the young investor's portfolio should not be kept more than 60 per cent.
Also, one should decide on the investment objectives. The three common categories of investment objectives with different level of risks are:
1. Capital appreciation: Here, your primary goal is to grow the value of your portfolio. But, the best capital appreciation prospects are usually the most volatile, and hence, the riskiest stocks.
2. Balance of capital appreciation and capital preservation: You want to grow your capital but without undue risk.
3. Capital preservation: You want to achieve reasonable returns but the first priority is preserving your existing capital. This is the lowest risk category.
Common mistakes done by young investors
Temptation to make quick money: Many young investors do not decide the investments objectives before investing. The investments should be done on the basis of goals and requirements in the future. However, youngsters generally invest their money in different asset classes to make quick money, which may prove to be riskier.
Starting late: Few investors start investing when they ‘can’, but wait until they ‘must’. The earlier you start, the easier it will be to achieve your goals.
Confusing investing with speculating: Many investors, including young investors, believe they are investing when in fact it is more like gambling. It is good to speculate with a small portion of your funds but one must completely understand what they are doing. The first speculative concept to avoid is day trading i.e. trading very rapidly in and out of a stock.
Curtailing the time horizon: Many young investors lose their patience and end up with losses when their investments are not growing. Impatient investors usually shorten the time horizon of their investments.
(The writer is CEO of Investment Shoppe India Ltd)