Investment plan

Treat Investment as a basic necessity of life
It is amazing to realize that how-less people know about investment plan. Whenever I discuss with about investment it becomes clear to me that majority people are ignorant. The most they can talk about investment is mutual fund, stocks or properties. Most of the people know how to run but they do not know why they are running or what the destination is. Investment is like running a marathon, start slow, run consistently and with the objective of reaching the finish line (goal) within a specified time. People should remember that a full length marathon cannot be completed even by the fittest of sprint racer. The strategy and skill required to run a marathon (long term investment) is completely different from running a sprint (short term stock trading). It will not be wrong to say that both are actually opposite of each other. Majority people conceive investment as stock trading; buy low, sell high and make quick bucks. But investment is not about making quick or easy money. Investment is a discipline, a habit, a necessity which ultimately translates into capital gains /value appreciation. Like we learn to eat, talk, walk, study, work, socialize and enjoy we must learn to invest our money. Treating investment as a basic necessity of life is the first step. Only Investment can give financial independence. Investment is one tool, if properly done, benefits the whole society. Even in the ideal world, investment is treated as a mean of socio-economic improvement rather than a money making strategy. But some less wise people has made investment synonymous with ‘stock-trading’ and way of making easy money. This is the reason why every one claim that they know about investment but in reality they talk only about stock trading- buying low and selling high. This is not investment this is gambling and speculation. If air is for life, investment is for economy and wealth generation. If we want our money to breathe and live longer then we must give it the air of investment.

It is possible to make fortune by investing
Investment is as easy as riding a bicycle. Till one has not learnt it looks impossible. Investment to me is a automatic mechanism. It virtually needs zero effort to make a fortune by investing. A good investment only needs a sound logic and correct information at the right time. There is no super-trick or special-skill required to do a wise investment. The rules of investment are simple, start early, and invest regularly. Long term investors have always benefitted form the process of investment because as the net worth of the business grows the stockholders value also grows. Net worth of a company take time to appreciate, it takes mostly 3/5 years before it makes periodic jumps. I will talk about investment more specific to stock because it is here that most illiteracy and indiscipline persists. I would like to stress on one point that “stock trading” and “Investment in Stocks” is not the same. When we use the word investment with stocks it is not the same as buy-and-sell, instead it is more “buy-and-hold”.

Buy and hold to increase net worth
When a long term investor buys stocks, he never buys it with the objective of selling it in immediate future for profits. Warren Buffett buys stock to own it forever. Long term investors buys stocks to increase their net worth so as to increase their financial independence. Net worth can be simply understood as cost of investment plus incremental appreciation in value. If an individual has invested $1000 in stocks and by the end of the year (say) the value of his stocks has appreciated to $1250 it means the net wroth of investment is $1250. Cost of investment is $1000 plus incremental appreciation of $250. The process of investment calls for continuous feeding of investment which ultimately translates into substantial growth of net worth.

When we started this discussion we made a statement that majority people do not know why they are investing and what their investment goal is. Now we can answer that investment is done to increase net worth which ultimately translates into the ultimate goal of financial independence. To understand what financial independence is, we will see a small example. Suppose Jack needs $750/month to maintain his present standard of living. Jack is totally dependent on his job $750 from his monthly pay cheque so we cannot call him financially independent. To attain financial independence he must find a way to generate $750 per month which he will earn irrespective of whether he is working or not working. Let us see how much time it will take for him to develop sufficient net worth that will give him monthly returns of $750.

Supposing Jack wants to take premature retirement after 23 years from now when he will be 55 years of age. In 23 years he will be able to avail $100,000 form the retirement scheme of his company. After retirement jack should have sufficient wealth so that which will generate him sufficient interest equivalent to $750 of today. Assuming if he puts his money in fixed deposit after retirement he will get approximately 6% interest. Means he must have at least $130,000 so that @ 6% per annum return he will generate a return of $9100 annually ($750 / month). He already has $100,000 form his retirement scheme of his employer and balance $30,000 he decides to generate form stocks. Assuming stocks will give his an annual CAGR of 22% plus 3.5% dividend, minus inflation rate of 8% (22%+3.5%-8% = 17.5%); he will be required to invest $100 each month for next 23 years to generate $30,000

So the end of twenty third year his net worth will be $100,000 + $30,00 = $130,000. The above calculation is with an assumption that the income generated form value appreciation (22%) and dividend yield (3.5%) is re-invested to buy more valuable stocks.

Conclusion
It is important to invest the hard earned money and gradually grow ones net worth till financial independence is achieved.

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