Monday, February 1, 2010

Investing early pays better in long term

It is a known fact that thinking about investments early in life helps a lot but there is no definition for 'early'. For instance, in the last few decades investors aren't thinking about investing in property after retirement but well before it. In certain cases, young professionals are picking up property even before marriage and family.

So, the starting age for investing has been sliding down and as a result, the risk-taking ability has gone up substantially as the young have the courage to be aggressive.

Interestingly, not all young investors think they need to be aggressive with their investment options. Since the choice of products is influenced by the parents or their style of investing, many end up investing in a conservative way. In many cases, the products are chosen without much knowledge or proper understanding.

Here are some tips for young investors:

Choose according to your need

No product would fit the needs of different individuals and hence the choice of products is crucial for any investor. If you are beginning the investment process, make sure to understand the risks or features thoroughly. For instance, if you are not comfortable with long payment periods, avoid products like insurance or public provident fund as they expect long payment tenures. Though insurance offers the flexibility of short tenures, it would not be rewarding.

Think long term

The advantage of starting early would be defeated if you don't continue with the investment process for long. For instance, saving Rs 1,000 at 25 is good provided you do it for the next 30 years. On the contrary, saving the money for just a year will do no good.

Take risks as you have age on your side

At a young age, it is natural to feel uncomfortable with the nuances of money. Managing personal wealth is always a difficult task when compared with professional money. Yet, the task gets easier because of the long tenure money enjoys. The advantage of a long period of investing should also enable the investor to take risks by investing in products like equity which carry higher risk.

However, if one holds on to an investment for a long time or invests in a systematic way, the risk gets mitigated.

Review at regular intervals

Starting early has its own advantages, but generally, an investor ends up taking small steps towards investing. Hence, it may not be sufficient to meet long-term growing needs in line with the changing times. For instance, a mid-sized property may not be good enough when the size of the family expands, and the fixed deposit balance might well become the average savings balance a decade later.

So, review at regular intervals is a necessity and should be done in real earnest. While setting up a goal early in life is a big motivator, the goal in itself is a moving target. Hence, review your long-term goals at least once in 5-7 years and make the needed re-allocation accordingly.

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