“An investment in knowledge pays the best interest” — Benjamin Franklin
Whether it is your investments or career, the more knowledge you gain, the better for you. Before you start investing, you should acquaint yourself with basic concepts like risk, returns, asset allocation, various financial products and their features, financial goals, steps to achieve them, etc.
Asset allocation requires investing in various asset classes like equity mutual funds, fixed income, gold, real estate, etc. You should understand the features of each of these products before investing in them. For example, when it comes to investing in gold, you should understand the factors that affect gold prices, why you should invest in gold, the different ways of investing in gold, taxation, etc.
Every financial product has a primary purpose that you should understand. For example, equity mutual funds are for growth, fixed income is for stability, gold is a hedge against inflation and economic uncertainty, insurance is for protection, real estate (house) is for living, etc. So, you should do the necessary research and analysis before deciding to invest.
“Be fearful when others are greedy. Be greedy when others are fearful” — Warren Buffett
As per this quote, the best time to invest is when the market falls sharply or during an economic recession. The stock market and the economy move in business cycles. Every bust is followed by a boom, and vice versa. After every significant market fall, there is recovery and eventually, the markets reach a new high. So, when you invest during a big market fall or a bear market, you make good returns in the next bull market. Hence, Warren Buffett says, be greedy when others are fearful during a big market fall, and go ahead and invest.
Similarly, many people invest more money during a bull market, hoping that the market will keep going up continuously. However, during these periods of euphoria, you should be cautious of the valuations and fundamentals. If these are stretched, you should sell and book profits. Hence, Warren Buffett says to be fearful when others are greedy during a bull market.
While what Warren Buffett says makes sense, it is difficult for an investor to time their buy decisions during a bear market and sell decisions during a bull market. Trying to time the market is certainly not the best thing to do.
“Time in the market beats timing the market” — Ken Fisher
In the earlier section, we saw how it is difficult to time the market for buy and sell decisions. Hence, Ken Fisher says time in the market is more important than timing the market. You should invest regularly through the systematic investment plan (SIP) route and stay invested for the long term.
In the long run, you can benefit from the power of compounding and create wealth to fulfil your financial goals. The Nifty 50 Index started with a base value of 1,000 in November 1995. As of 29th December, it is trading at a level of 21,731. Thus, it has multiplied investor wealth a whopping 20 times in the last 28 years.
Similarly, the other indices, such as the Nifty Midcap 150, Nifty Smallcap 250, etc., have also created wealth for investors in the long term. Warren Buffett has also emphasised the importance of staying invested for the long term with his famous quote: “Our favourite holding period is forever.”
“Don’t look for the needle in the haystack. Just buy the haystack!” — John Bogle
With this quote, John Bogle recommends investing in the entire index through index funds rather than investing in individual stocks. A concentrated portfolio with few selected stocks can be risky if the selected stocks don’t do well. However, when you invest in all the stocks that are a part of a broader market capitalisation index, you diversify your portfolio in terms of stocks and sectors. Also, index funds have a lower expense ratio compared to active funds.
Some of the popular indices on which AMCs offer index funds and exchange-traded funds (ETFs) include:
a) Nifty 50
b) Nifty Next 50
c) Nifty 100
d) Nifty Midcap 150
e) Nifty LargeMidcap 250
f) Nifty Smallcap 250
g) Nifty 500
h) Nifty Microcap 250
“The biggest risk of all is not taking one” — Mellody Hobson
All asset classes have risks. However, the degree of risk may vary among different asset classes. Usually, the higher the risk, the higher the return potential, and vice versa. Historically, equity mutual funds have given higher returns, although with high risk. Similarly, fixed income has given moderate to low returns with low risk.
Young individuals have the capacity to take higher risks, benefit from equity investments, and create wealth. However, if an individual doesn’t take any risk at all and sticks to assets like bank fixed deposits, money market, Government Securities, etc., they may have to contend with moderate to low returns. These returns may or may not help fully in achieving financial goals. Hence, Mellody Hobson recommends taking some risk, especially early on in life, as it has the potential to deliver higher returns.
“Do not save what is left after spending, but spend what is left after saving” — Warren Buffett
With this quote, Warren Buffett highlights the importance of savings. After all, you will be able to invest only when you save. The higher the savings percentage, the more you can invest towards your financial goals, and the sooner you will achieve them.
Most people follow the traditional budgeting equation:
Income – Expenses = Savings and Investments
However, you can prioritise your savings and investments by flipping the above equation as follows:
Income – Savings and Investments = Expenses
With his quote, Warren Buffett recommends following the above equation. It will help you reach your financial goals faster.
Start 2024 on a firm footing: Follow the investment advice of legendary investors
In this article, we discussed the investment advice given by some legendary investors. Similarly, if you do some research, you will come across many other quotes from other legendary investors. Most advice is centred around gaining knowledge, saving and investing, investing when markets are down, staying invested for the long term, taking some risk in the early stages, investing in index funds, etc. Following this simple advice can help you create wealth, achieve financial goals, and attain financial freedom.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
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Published: 11 Jan 2024, 11:05 AM IST