Begin to Invest - your first steps

[RRK]

Begin to Invest - your first steps

Lot of beginners have no clue where to start when it comes to investing.

It is almost like our first love. When we are teenagers we want to find a girl friend or boy friend as a companion, but we dont know how to get one. So, we ask friends, who are also clueless.

We read books about love, go to movies to learn how hero gets a girl, and go to parties or family functions to try what we learnt and finally we find a good partner.

Some who are lucky to get a good partner in first attempt, ;) some have to go through difficult patches in life to find a good partner. It is not easy for lot of us.

Believe me, starting to Invest is actually harder than that. ( Once you start, it is not difficult at all. )

Because, there are not many good books around, there are several books to mislead beginners, because they are written by people with short term vision, traders, crooks, and pimps - who want to make quick money.

How to find the good books from all these non-sense ? Where to start ?
Whom to ask ? Are the friends we party with are experts for us to seek advice ? If so, why did they lose a bunch in trading ? And why didn't they quit ?

Many of the beginners don't even know what question to ask, then how to find answers.

In this forum ( we started 5 years back) and we dont suggest some one to buy a particular stock or sell some stock. We dont encourage trading, we dont, suggest speculation.

These actions could be entertaining, but ain't help to build wealth.

So, what do I recommend for a beginner ?

Investing is a long term commitment. For this commitment, you got to have an objective first, understand the risks of investing, and adjust your expectation to reality. You have to be mentally prepared and ready to devote time to learn new things, and avoid emotions affecting your decision.

Before you start this long journey, you have to be prepared. By preparation, I meant, you have to take care of certain things. Imagine yourself, leaving for a long vacation on road. Would you just take the car key and go ?

There are pre-requisties that you have to take care before you start.

Keep this as a check list before you begin.

1) Build an emergency fund ( It is like packing first aid box, road maps, cell phone, ofcourse cell phone charger, torch light, tire kit, AAA card )

2) Take care of your insurance needs - car insurance, medical insurance, life insurance, liability protection, disability insurance etc., ( It is like checking your brakes and engine oil before your car journey )

3) Learn your friends and foes in this journey.

Friends - good support network, like our website, experts, good books, good websites;

Foes: CNBC, your broker, bad insurance agent, friends w/o no idea about investing but can talk convincingly, our own emotions - greed and fear.


Will write more..:)

[RRK]

http://news.morningstar.com/article/article.asp?id=182580

[Desi]

RRK,

Good post.

[r2ibabu]

RRK,

Good one. Thanks!

[DosaiLvr]

RRk,

Thanks for the link.

It's an interesting article. 12 mths expenses in emergency funds seems right to me.

Any tips on where to park the emergency funds so that it is readlily accessible yet continues to grow reasonably.

If everything is hunky dory, I would park an amt equal to 8 months expense in an emergency fund and let it build itself into a 12 months fund?

Or may be split the funds into a 3 months worth cash in savings account, another 3 months worth in a 45 day FD (which we keep extending, if there no need to tap into this fund) and another 6 months worth in a fund/investment that would yield higher?

Thanks

[KRV]

RRK,

As usual, your posts on finance stand out like a beacon of light in a dark sea of confusion caused by the "Foes" as you mention. I hope many beginners in the forum follow your series of posts on this topic.

[lsvenkat]

Hi all

I am certainly no expert in Finance. Also I do not have any Degree in Finance and all my learning has been mostly the hard way [from mistakes]. So please read this post keeping that in mind and do consult a qualified financial advisor and good books on Finance before making any investment decisions

RRK has started in a very good way and I will add my 2p as well.

First step to understanding investing is that it is certainly not rocket science. It requires being a student and also requires discipline, patience and doing your home work with regards to chalking out your short term, medium term and long term goals. Thought it may look intimidating at first it is certainly after all just arithmetic that is involved in the end. Understanding your risk taking ability at every stage of your life is important to ensure that you keep investing without jeopardizing your short term / medium term goals while still staying focussed on the long term goals.

Stick to the basics and do not expect magic to happen overnight [not even in 1-2 years]. You have to be systematic, consistent, patient and have that willingness to embark on a journey of continous learning for the rest of your life.

One of the first steps to make before investing is to understand what your spending patterns are. Make a simple list of the recurring expenses that you incur and make it a point not to omit anything however trivial it may seem at first sight or however small the amount may be. Make guesses when it comes to things like HOLIDAYING and be realistic in your guessing.

Some of the obvious ones are

House Loan EMI/Rent
Electricity
Telephone [Landline]
Mobile
High Speed Internet
Cable TV
Children Education
Car Fuel
Car Repairs/Maintenance
Groceries
Cooking Gas
Ironing
Maid Salary
Driver Salary
...
and so on [list varies depending on individual]

Then there will be the yearly/non-monthly expenses like

Insurance Premium
Credit Card Fees
Demat Account/ONLINE Trading Account Fees
Library Membership
Entertainment [Movies]
Eating out
Holidaying
School Fees for Children


Once you have these lists then you will at least realize where your money is going presently and how much you can set aside for savings comfortably without compromising on your current standard of living in a significant way. Also you should look critically at expenses that can be reduced / avoided all together in the quest for optimizing your savings.

It is important to understand whether you are currently TAX OPTIMIZED also you need to understand whether you have some HIGH INTEREST DEBT like Personal Loan, Credit Card Loan which you should plan to close at the earliest

Simple rules of Thumb

1) Do not have more than 1 Credit Card unless you have a very specific reason / purpose to have multiple cards

2) Do not have any DEBT other and Housing Debt, particularly avoid the high interest debt like PERSONAL LOANS, CREDIT CARD Loans.

3) Do not invest in a Stock based purely on a so-called hot-tip. It could turn into a cold-one very soon ?!.

4) One can never buy a stock at the lowest price

5) One can never buy a stock at the highest price

6) Start a Younger age. It is better to start with Rs 1000 a month at Age 23 than to start with a higher amount at Age 30. The Longer you have to invest the greater your chances of taking advantage of compounding effect that will multiply your money the fastest.

7) Diversify your investments into Financial Instruments of Varying Risks. For e.g. A combination of Fixed Income Stuff like PPF, NSC along with some medium risk stuff like Mutual Funds coupled with some high risk stuff like Stocks / Equities.

8) Past Performance of a Stock / Mutual Fund may/may not be sustained in the future. It is important to look at the right time-horizon while investing in Mutual Funds [For e.g.] and I would recommend nothing less than 3 years as the time horizon to look at probably an even longer period.

That is for a start, hope this is useful


Regards

Venkat

[FreeSpirit]

For investing, one needs to save money first.

1. Always try to live below your means.

2. Do not try to keep up with Jonesses.

Couple of good books:
1. The Little Book that beats the market http://www.amazon.com/Little-Book-That-Beats-Market/dp/0471733067

2. The Four Pillars of Investing
http://www.amazon.com/Four-Pillars-Investing-Building-Portfolio/dp/0071385290/sr=1-1/qid=1170188894/ref=pd_bbs_sr_1/105-8765144-3862809?ie=UTF8&s=books

[Realgeni]

HI RRK,

Very nice post to start the forum

Can you provide mroe insight in to some of the following things


2) Take care of your insurance needs -
life insurance - What options are availble and any specific companies
liability protection,
disability insurance etc.,

[pjigar]

Speaking of Life Insurance,

Definition: Do not mix insurance with investment i.e. do not ever buy annuity product. Annuity means life insurance with residual return at the end of the term.
Term: To cover you life insurance need, you should always buy term life insurance. The term should, at least, last till your financial responsibilities to others (Bread making for family, children's education, wedding, etc.) are ongoing/pending. The term should not go beyond your retirement age because if you die during retirement then the income will continue from your investments. Remember, insurance is only back up plan: once you don't need back up, you don't need the back up plan.
Amount: Your life insurance pay out must be able to generate your current gross income. You may want to inflation adjust the payout amount for half of your term period to be safe.

Now to answer you original question, which companies for life insurance? You should pick reputed companies that have been around for more than your life time. The last thing you want is a bankrupt company after you die. Pick well known global brands. The premium will be somewhat higher but it is worth the piece of mind.

For liability insurance, get it from the same company as your home/car insurance. You will get discounts for multiple products. Liability insurance is also known as umbrella insurance.

Disability insurance and health insurance is best f bought from employer sponsored group plan. It is cheaper. I do not have any experience for those insurance bought outside employer sponsored plan.

Hope this helps.