It’s not easy to stay invested in the capital market, and challenges for first-time investors are very stiff.
by Sajjad Bazaz
In the modern investment scenario, people are looking for more and more investment opportunities to multiply their savings for future needs. They are curious to know more about lucrative investment platforms. People mostly are lured by capital market and stock investment has become their preferred investment arena with a hope to multiply their money fast. It’s here that they overlook the huge risk which this market is carrying along.
Notably, during the two years of the Covid-19 pandemic, millions of first-time investors boarded the capital market and parked their money in various financial instruments, especially company shares, for ‘better’ returns.
Actually, the modern financial system is illuminated in such a way that even small investors get attracted to explore opportunities and expand their portfolio. The ‘hefty’ returns on investment are highlighted which lure a common man to take a dip in the market by hook or by crook. The greed to make easy money has now become so intense that most of the time it overpowers their financial wisdom.
However, it’s not easy to stay invested in the capital market and challenges for first-time investors are very stiff.
Let me share an interesting question posed by a reader regarding the ‘most appropriate age’ for making investment in the capital market – share market, that is.
In the backdrop of the kind of exposure given by the media to various investment opportunities in the share market in the last few years, more and more people are looking at the markets as their future investment channel. Lots of parents are lured to think of ways to give their kids a headstart on saving and simultaneously building wealth.
But, in contemporary times, saving alone is not enough. It’s here that the ‘investment’ comes into play.
For example, you save Rs. 5000 every month after making expenses towards your needs. If you keep this saved amount idle, over a period of time (say one year) you would find that the saved amount would not be enough to buy you enough things as it would have facilitated you a year ago. This means money loses value over a period of time, while prices of goods and services soar much faster than the value of money. This kind of mismatch necessitates that you let your money talk and multiply preferably at a pace much faster than inflation. So, if you want to negotiate the cost of living, which goes up every year, then investing your savings into profitable investment instruments is the most appropriate way to build a strong financial cushion for future needs. It’s precisely the investment which can lend you help to create wealth.
Here lies the opportunity for you to invest your money in equities (shares) and bonds. While investing your savings into these financial instruments, you need to work out three basic things: safety of the money invested, to get the money back as and when required (liquidity) and highest return on investment. In this market, returns on investment are high, but so are the risks associated with your investment. However, you can mitigate these risks by investing in a variety of stocks. Which means: distribute your money among a variety of stocks/shares that may rise and fall at different times. This way you will insulate yourself against those big ‘hits’ that your entire investment portfolio could suffer when one class of stock is hit hard.
I have been consistently advocating that parents should arm their children with the techniques to deal with financial matters. Times have changed, exposure has increased and today in this growing age of consumerism our children are primary targets for their money power earlier than ever before. This means parents have an added responsibility to help their children to be more responsible with money and teach them investment for wealth creation. The financial lessons should begin by inculcating saving habits in your children and guiding them to various financial schemes.
Meanwhile, with regard to the question of the most appropriate age for venturing into the share market, it is definitely the age which is one of the most important factors that governs the investment pattern for an investor. A young professional with minimal responsibilities and long investment duration can think of putting more money in riskier securities. However, this might not be true for someone who has family responsibilities like dependent parents and children. Such an investor will look at safer investments.
Precisely, investor’s age occupies centre stage and age-appropriate investment portfolio is inevitable. While passing through various age brackets in life, tastes of a person undergo transformation. Forr example, colour choices in clothes, taste in food etc alter with increasing age. Exactly on this pattern, investors’ appetite for investment should observe transformation.
Setting of financial goals, attitudes to risk and the time over which you are investing is directly linked to the age of an investor. In different age groups, these choices change and here financial planning is imperative. And while planning investment, one has to keep in mind there is no one-size-fits-all approach to financial planning. Two investors who are the same age may have different time horizons in terms of retirement from work or different financial requirements for necessities like their children’s marriage and education.
In context of age-appropriate investment, let me also tell you that whether you are a young outspoken guy keen to play the stocks or a mature investor seeking lower-risk assets, your age will definitely have an impact on your investment choices. In case of an investor who enters the market in their early twenties, a higher-risk investment portfolio might be an appropriate solution. Their investment horizon might be long term as they may not require the funds for several decades. Greater exposure to the stock market, and even more volatile sectors, such as emerging, might be suitable for a younger investor.
In contrast, an investor in their late fifties has exhausted their risk bearing capacity, as age is not on their side. The best bet, in this scenario, is to remain focused on reducing the risk while remaining invested in the market. The large portion of the money invested by this aged investor might be destroyed by the plummeting stock market when there is too little time to recover.
Meanwhile, what is important for investors across age spectrum is to pursue diversification of investment portfolio and of course striking balance even after observing diversification. Here, it is most important for all age-group investors to know what they own. They should know what it means to be diversified. Needless to mention that investment in the stock market should be done according to the risk-bearing capacity, following the ‘cut your coat according to your cloth’ adage. So an investor should first determine the overall exposure to equities they are comfortable with and then decide how much additional risk to build in by including smaller-cap, small-cap-value, international, and emerging-market stocks as well as real estate and commodities.
You may switch to less risky investments, which is a sensible move, when stock prices fall, but sticking all your money in the metaphorical mattress is not a long-term solution either. With interest rates paid on savings accounts being very low, the value of cash risks is eaten away by inflation. On the other hand, an investor also has to accept that all investments, even those perceived as safer can lose value. Don’t rule out the possibility of getting back less than the money invested.
To conclude, helping young minds expose to the world of capital markets at an early age is not bad. This can encourage them to focus on building wealth through investments as adults. There are options of investment in stock markets which suit young minds. Any age is a perfect age to start a child’s investment account. However, seek independent financial advice from a financial consultant who has the ability to tailor an investment portfolio specific to your age and the circumstance.
Sajjad Bazaz heads Internal Communication & Knowledge management Department of Jammu & Kashmir Bank Ltd. The views expressed are his own and, not the institution he works for.