Are The Investment Lessons We Learned From Parents Still Relevant?
Sep 16, 2019

Author: Divya Grover

(Image source: photo created by katemangostar - www.freepik.com)

In school we learned that Re 1 plus Re 1 makes Rs 2, but it was our parents who taught us how to manage the extra Rupee by their example.

In doing so, they inculcated in us the important lessons of saving, budgeting, and investing. These lessons imparted by them shaped the way we value money and manage our finances.

[Read: Are Your Spending Habits Influencing Your Children?]

Our parents grew up in an era when the concept of financial planning was seen as an option only for the rich and the famous.

Bank Fixed Deposits (FDs) were the most favoured investment options. At the same time, many of them preferred to keep high cash balances and gold in their house for emergency situations.

Lack of awareness and fear of capital erosion caused many people to stay away from investment in equity markets, even though the markets were not as volatile back then.

The younger generations still look up to their parents for investment advice. However, times have changed and so has the financial environment. This demands a change in our investment approach. In the current circumstances, the strategy which worked for our parents may not work for us.

[Read: A Portfolio Strategy That Could Help You Reduce Shocks Of The Equity Market]

With a plethora of investment options available, it is becoming increasingly difficult to find the right product for our needs. There are high chances that you may end up with an unsuitable product and incur losses. Thus, proper financial planning is the need of the hour.

If you want to be successful at investments in today's age, it is necessary to start financial planning now by taking into account the following important points:

Don't put all your eggs in one basket

As the Interest rates were high until few years back, investing only in FDs was justified and enough for our parents to achieve their financial/life goals. But now the interest rates on bank deposits are lower and expected to fall further. Hence, savings and FDs will not help us to achieve our long-term goals. There is a need to diversify the portfolio.

Diversification is a strategy which helps you minimise risk and maximise returns by investing in a mix of different asset classes. Investments in equities are risky but they can generate higher returns and counter inflation. To mitigate the risk involved with equity investments, you can invest in a diversified portfolio of large, mid, and small caps.

You need not select individual stocks for your portfolio; mutual funds offer a readymade portfolio of stocks with a variety of options to suit your needs. Select the type of funds best suited for you based on your risk appetite, financial objectives, and investment horizon.

[Read: Is Your Mutual Fund Portfolio Overcrowded?]

Additionally, park a portion of your portfolio in less volatile avenues like debt funds, bank deposits, and a provident fund. You may also consider investing in physical gold or gold ETFs as a portfolio diversifier.

Follow a goal-based approach

Our parents invested with only one goal, capital preservation, and were happy even with low-yield investments. To be a successful investor in current times, you need to clearly define your various goals.

Without a goal based investment approach you are likely to make financial mistakes that can cost your wellbeing. This means you should not be bothered by short-term fluctuations in the market. Instead continue your investment until your goal is achieved.

[Read: Are You Investing Without An Investment Objective And Goal In Mind?]

You may end up sacrificing one goal for another unplanned goal if the intention is unclear. For example, a person who has not carefully clearly defined goals may end up spending their retirement corpus for their children's higher education/business dreams, etc. This puts your future at risk because you cannot be sure whether your children will shoulder your financial responsibilities when you retire.

Opt for a dynamic plan

You cannot follow the same investment strategy throughout your life like your parents. As you grow older and/or draw closer to the investment time horizon, you should shift your equity investment to a less volatile asset class. Further you should increase you investment contribution in line with the increase in your income. However, if you are going through a financial crisis, your investment should have the flexibility to pause the investment whenever necessary. More importantly, your investment should be able to take advantage of changing market conditions.

Prepare for rainy day

Living expenses have risen considerably. Everything from food, clothing, medical expenses, and other essentials have become very expensive. In such a case, if you suffer a setback such as a job loss, medical emergency (not covered under insurance), etc. it can be become very difficult to manage daily expenses. So be prepared for such situations by maintaining an emergency fund to cover at least 6-12 months expenses.

Our parent's guidance is vital at every stage of life, but at the same time adapting to the changing financial and global environment will ensure that we benefit from the best of both worlds.

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