1. Don’t do goal-based investing
Many of you might be new to the stock market or to the finance world, so here is a quick and easy explanation on what goal-based investing is-
Often people save money in order to make certain expenditures.
E.g.- Saving Rs. 5000 every month for 4 months to take a trip to Shimla or they might save R. 5000 every month for a year to buy an iPhone.
Now, almost the entire subset of investors are encouraged to do goal-based investing.
If you go speak to a mutual fund manager, they will suggest you do goal-based investing.
If you go to a random website and they help you generate an investment plan, they will ask you what your goals are.
You should not do goal-based investing to begin with.
Well, why so?
Whenever we do goal-based investing, the majority of us end up picking a wrong goal at the very start.
There are essentially 2 types of assets in which goal-based investing is done.
a. An appreciating asset
An example could be- you doing an MBA from a top tier B-school. Your degree will allow you to earn a lot of money.
On the flip-side, if you do it from a random college, your MBA degree will become a liability.
b. Depreciating asset
This could be investing money into something which has no productive use.
“Productive use” here means to be able to make money in a sustainable manner out of that asset.
Problem arises when we do goal-based investing in depreciating assets. This is something one must completely, completely avoid.
E.g.- Purchasing an iPhone and not doing anything worthwhile with it.
The bottomline is, when we start goal-based investing, we get the definition of goal incorrect.
2. Understand and optimise assets.
There are 3 types of assets a person has.
The first is time. It is a critical asset and is finite.
The second is money. You can invest money and make more.
The third is skills. If you have skills, you can improve your hourly rate and improve your earning potential or increase your income streams.
There is a strong confluence between these 3 assets.
Let us understand this sentence with an example.
If you are in college, you will have a lot of free time. If you are time-poor in college, it mostly means that you are wasting time.
You are time-rich but money-poor in college.
You can use the free time to learn a skill like video-editing, graphic designing and make money.
Essentially what you did is, you used an asset that you are rich in (time) to make money (an asset in which you were poor).
Now, in the corporate world you are money-rich but time-poor. What can you do?
You can create systems for yourself to get work done more efficiently.
If you understand the time ecosystem, money ecosystem and skill ecosystem well, and create a productive system for yourself, you will eventually attain more confidence and freedom.
3. Don’t invest in get-rich-quick schemes.
People want to make money quickly and don’t understand the risk involved with it.
Don’t invest your money into any asset, particularly stocks with the intention of getting rich quickly.
The most sensible way of getting rich is to
- Understand business analysis.
- Understand crypto analysis.
- Understand stock analysis.
And invest only in assets which you understand and have confidence in.
99% cryptos are bad cryptos. In fact, even 80-85% stocks are bad as well.
Our job as investors is to invest in good asset classes, stay diversified and even within those asset classes we need to pick the best assets possible.
4. Think long-term, think sustainable.
Let us understand this point through the example of a human and an insect.
Us humans are capable of doing something called as nexting.
Nexting simply means that we have a second layer of thinking available to us.
We can think of the future, we can predict things.
No other mammal or insect is capable of doing that.
We must use this power of thinking long term to our advantage. Whenever you are investing money and time into learning a skill, think about it from a long-term perspective.
Doing an MBA, dropping out of college, or maybe NOT dropping out of college, we can make these decisions based on what the long term consequences might be.
5. Generating visual cues.
Imagine you are earning 1L per month. Every month that money is put into your bank account.
You keep aggregating that money and eventually become complacent and lazy.
Investing your money into assets allows you to create a barrier between you and your money.
Creating a distance between you and your money gives you more incentive to work.
This also applies to spending.
Go to a random city, try spending 10K in the form of cash and another 10K in the form of plastic money (credit, debit cards).
You will feel a lot more pain spending physical money than plastic money.
Spending physical money creates a visual stimulus which allows us to be more cognizant.