We see
many marathons around the country at this time of the year (genrally
in January/February) where professional runners and common people both run
marathons and half marathons in cities across the country. There are many
similarities between long distance running and executing long term financial
plans. As we understand “Long term wealth creation is not like 100-200 meters
sprint where someone starts with a bang will win also. It's like marathon,
which should be executed over years in a very systematically manner”.
For marathons or any long distance running it is
said “when the going gets tough, tough gets going“. In some cases, this holds
true for long term investing as well. Like in marathon for investments also
there are certain parameters which should be kept in mind while making
investments. These are:
1. SET THE GOAL FIRST
In marathon the goal for a runner running a
marathon or a half-marathon is to run the full course, that is to run the 42-km
long stretch in one go and not to get down in between.
Similarly in Investments the investor should first
prioritise the long term financial goals. For example the goals could be,
children's education and their marriage, buying a house or own retirement etc. Like
we cannot reach a destination if we don’t know where to reach similarly without
goals achieving them is also not possible.
2. STARTING IS THE KEY
In Marathon the runner starts slowly, runs 4-5 kms
daily during initial days and increases the distance slowly every time so that the
body gets used to the distance.
In long term investments also an investor should
start investing with small amounts. He should regularly invest every month and
then increase the monthly investment amount as the income increases.
For long term investments a systematic investment
plan (SIP) in a mutual fund scheme works in the same way in which one could
start with as low as Rs 500/1000 per month and increase the monthly investment
amount every year or as and when the investor's income increases.
3. GET USED TO DIFFERENT ENVIRONMENT
In Marathon when the runner gets used to the
surface (plain area/ field) on which he is running, then the trainer pushes the
runner to change the surface. From plain surface, the runners then starts
running on uphill and downhill roads, on sands and other surfaces also so as to
make himself ready to face different environments/scenario.
In Investments also normally financial planners
advise an investor to start investing in a simple and less risky products, say
a mutual fund scheme working of which he could understand easily.
Once the investor gets used to about how the scheme
works and gains confidence, then his financial advisor advises the investor to
invest in some other schemes which are slightly more complicated/ risky and may
have different style of workings/ return potential.
4. BE REMAIN ON THE PATH
In the Marathon during the race, there could be various
ups and downs but the runner has to be prepared to face then and overcome all
such obstacles and complete the course.
In investing also an investor who is aiming to
generate wealth in the long term, has to be ready to face the markets short
term ups and downs, which are referred as volatility. When an investor is
investing for building his retirement corpus, he should stick to that goal even
during volatile market phases. Here the focus should be long term and should avoid
the urge for instant profits for long term rewards.
5. MAINTAIN THE PACE
For a marathon runner, It is very important to
maintain a steady pace through the 42-km run. Its not advisable to start at a
very high speed and spend the full stamina at the beginning itself.
Similarly for long term wealth creation too one
should never start with a large sum of money. Even if one has a large amount at
his disposal for investing, it's always advisable to put the money in a liquid
fund and start an systematic transfer plan so that the whole system works like
an SIP from a liquid fund. This way the investor spreads out the risks and
averages out his cost of acquisition.
6. REVIEW AND REBALANCE
A Marathon runner needs to check if he is running at
regularly that whether it is as per the plan. And if it is not then he may have
to change the pace/plan.
In Investments also during the financial journey,
the investor also needs to review his financial plan. And in case it is found
that they are off track he needs to rebalance to bring it on track.
7. EYES ON LONG TERM GOALS, NOT THE SHORT SPRINTS
During the race, a marathoner should never try to
increase his pace suddenly and start running very fast. They are trained for
long distance runs to maintain a steady pace which he is able to maintain
throughout the race. They are allowed only minor variations in speed but not
very significant variation.
Similarly for long term investments, investor should
avoid the short-term attractiveness of trading on tips and market information.
Tips could earn fast bucks, but it's almost impossible to successfully make
money by trading on tips. So long term investors should avoid the lure of
trading on tips.
8. REACHING THE FINISH LINE
In long distance runs like marathons, the runner should
not stop immediately even after completing the marathon, He should run slowly
for some short distance and then rest.
Similarly for long term investing an investor
should not withdraw at once but slowly transfer the money from equity to debt
based products and then he may take out the money slowly form there.
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