It’s often thought that if it isn’t complicated; it’s not serious or something is not right especially when it comes to investing. But over the years I have understood that the most complicated thing in this financial world is “simplicity” and I have been striving hard to find new ways to explain people the art of investing. This week I’ll discuss how investing is akin to driving a car.
Best speed to drive a car
The million dollar question for which everyone wants an answer is “Which is the best product to invest”?
But what if I ask you “What’s the best speed to drive a car”? Nuts I am; isn’t it? Because the speed of the car primarily depends on the distance you want to travel. If your destination is nearby you prefer to take it slow may 1st or 2nd gear. If it’s a little distant but within the city limits then the speed normally is 3rd or 4th gear but if it’s in the outskirts or far away then you generally drive at 5th or 6th gear. These are the normal driving rules that usually people follow to avoid mishaps or to make it to the destination in time. Hence it can be said that there’s no perfect speed to drive the car because if you drive too slow then you may get too late in reaching the destination or if you drive too fast there are chances of mishaps.
Similar is the case with investments. There’s absolutely no best product because the best product for you is defined by the time you have for your goal. For instance if your goal is to set aside money for emergencies then you should drive slow may be a 1st or 2nd gear so that you can stop the car whenever you want as the need for money may arise anytime. But if your goal is far away then you should drive fast with 5th or 6th gear so that you do not miss on your goals.
Gears of Investments
The gears of investments have been broadly classified in three asset classes namely liquid, debt and equity.
Liquid Assets – These are the assets that gives you the flexibility to withdraw your money anytime without the loss of capital. These are the most appropriate investments for your short term goals like creating an emergency fund, planning a vacation etc.
Debt Assets – These assets offer stability and offer returns better than the liquid assets. So if you have medium term goals for which the horizon is atleast 1-5 years, they are a perfect fit.
Equity Assets – They are growth assets and offer returns that beats inflation in the long run. They are wealth creators and best investments for long term goals.
Best Speed to Drive the Investment Car
Having understood the gears of investment, let’s understand the best speed to drive your investment car. To simplify this I created a 10-10-10 Rule which I have been speaking of in my previous articles as well.
This rule states if your goal is 10 days away i.e. the need for money may arise anytime in the near future, then you should park your money in liquid assets.
If the goal is 10 months away i.e. the need for money would arise sometime later and the horizon is atleast 1-5 years, then the money should be parked in debt assets.
If the goal is 10 years away i.e. the money would be needed after 10 years atleast, then the money should be parked in equity assets.
So from now onwards if you have to evaluate the best product to invest in. Follow the three step process:-