Is SIP Safe To Invest?

SIP of course is safe to invest in, unless the world is destroyed by a nuclear conflict or climate change, which I do not foresee happening anytime soon.

Besides external factor like wars and global warming, we ourselves destroy the inherent safety of investments, including the SIP, by constantly worrying about the performance of the investment, market conditions, etc. The media also is doing a lot of disservice to the investors through their relentless noise.

What is the Solution? Once you have started a SIP, just keep it alive, by monthly subscription, for a very, very long time, like 20 to 50 years. Simply turn a deaf year to what the newspapers may say or your family or friends may advise. 

By following this simple formula you not only ensure the continuation of the already built-in safety of the SIP, but also let the 'Miracle of Compounding' to work in your favour and most likely by the end of the said long period you will end up a very rich and character wise a very strong and disciplined person.

How Do I Invest Small Amount of Money in Share Market Safely?

Dear Friend!

I find your question is very sensible on two crucial aspects: small amount of money and safety of investment.

Safety of investment comes from knowing what we are doing. Conversely not knowing what we are doing causes ‘Investment Risk’. There are two things you can do:

1. You can learn investing safely in the share market through ‘Value Investing’ for which I recommend you read the wonderful book, “The Intelligent Investor” by Benjamin Graham. Value Investing is safe and shares can be purchased for small amounts of money. 
   
2. If you can not learn investing for whatever reasons, you may invest in an ‘Exchange Traded Fund’ or ‘ETF’ or a ‘Mutual Fund’.

ETFs:

An ETF is created by fund managers that exactly reflect popular stock indices like BSE Sensex and NIFTY. In India ‘Goldman Sachs’ provide many ETFs, the popular being ‘Nifty BEES’ and ‘Junior Nifty BEES’. You may also invest in any mutual fund of a credible organisation. ETFs can be purchased just like shares on the stock market through online online platforms.

Mutual Funds:

Mutual Funds are operated by reputed financial institutions. There are different funds based on equity, debt and various mixes of both. Debt funds provide regular income but no capital appreciation. Equity funds provide both. Please do not allow yourself to be confused by issues like which mutual fund best returns. All funds are equally good in the very long term.

What is important in investing is not to disturb the investments for very, very long periods of time, say for twenty to fifty years. Over such long periods of time the law of ‘Miracle of Compounding’ will work for you in creating significant wealth.

In conclusion, yes, you can invest small sums safely in the stock market and become rich over a long time.

Is it Advisable to Buy a Stock Before it Becomes Ex-Dividend?

Indeed a good question, after closely observing  the market behaviour, which indicates that the price of a scrip falls straight after the stock becomes ‘Ex-Dividend’ or ‘Post-Dividend’, approximately equivalent to the quantum of dividend. It is also true that the price usually climbs back to the previous level.

Therefore, it really does not make a difference, in the long run whether one buys a scrip before or after it becomes 'Ex-Dividend'. Even in the short term there is no loss and one may gain the dividend income as a bonus, when the price eventually regains its previous level.

The more important question is whether the stock is worth investing in, in the first place? If it is and if you one the money for investment, the sum should be deployed for purchasing the shares immediately. Not deploying the amount earmarked for investment is indeed a serious folly.

Since wealth creation happens only over a very long time, out of innumerable purchases of stocks, receipt of dividends and on the back of the law of ‘Miracle of Compounding’, all the minor variations will be ironed out, and really do not make any difference. One may buy the either before or after it becomes 'Ex-Dividend' and it may be slightly more beneficial to buy before, and I have personally done this a few occasions in the past and after having answered the question seriously considering repeating the scheme of buying immediately after dividend announcement.

Is the Stock Market a Place to Make a Fast Buck?

I have met in my long consulting career of about three decades many people who believe that the ‘Stock market’ is the place to make a fast buck – a place where one can become rich quickly. I have also met an equal number of people who is convinced that stock market is the most dangerous place on the earth, and that it is meant solely for gamblers and speculators and certainly not for investors. I can state with conviction that both the extreme views are far from the truth.

Playing the stock markets is certainly not the get-rich-quick solution. On the other hand those who enter with such a notion are sure to burn their fingers. Of course there are a few exceptional examples of individuals who have consistently made successful bets on stocks, currencies and commodities, but these examples do not hold good for most of the large number of speculators indulging in day trading. Those who had made quick gains a few times should attribute the success only to pure luck; they are bound to run out of lady luck soon and are face the unpleasant consequences.

Stock market is also a place where through prudent, disciplined and sustained investments, spectacular wealth can be built over very, very long periods of time, spanning two to four decades.

Why is it that there are no shortcuts to wealth creation? What are the essential ingredients of wealth creation?

Essentially there are two key factors behind wealth creation: natural growth in companies and secondly by the operating of the compounding effect.

Natural Growth:

Companies that supply goods and render services in an innovative and efficient manner are bound to prosper and consequently the long term investors owning the shares of such companies are also bound to prosper through regular dividends received during the long period of investment and appreciation in the market price of the shares, on the back of growth in the ‘Earnings Per Share (EPS)’.

Compounding

The amazing results of compounding were discovered and propounded by Albert Einstein. The ‘Miracle of Compounding’ works only over long periods of time and especially the spectacular results start occurring at the fag end of the very long period. Being a natural law like any other law of physics it operates at its own pace as per its own nature – there are absolutely no shortcuts.

To conclude, one cannot consistently make a fast buck playing on the stock markets, but through disciplined investments one can build significant wealth over very long time.

How Do I Invest ₹80,000 to Maximise My Returns?

Only stocks can give significant gains over a very long period of time. Fixed income instruments do not yield real returns in India, in the present market conditions where interest rates are low and inflation presently is around five percent but could go up to 10 percent or even more.

Many people mistakenly believe that stock markets are highly risky. yes they are risky for speculators and people who enter without any basic preparation. Actually risk comes from not knowing what we are doing and the so-called safe investment options can turnout to be not only risky but quite unproductive also.

You have two options before you, as follows:

1. You may learn ‘Value Investing’, in which case please buy the best book, ‘The Intelligent Investor’ by Benjamin Graham and get started immediately. You may visit my blog atValue Investing.

2. If you do not want to spend a lot of time on investing, you may simply invest your corpus in an ‘Exchange Traded Fund (ETF)’ that mirrors a popular index like DAX, Dow Jones, etcetera or any good mutual fund.

Now the most important aspect of investing begins. You simply forget about the investment till 20 years.

Following table shows what your investment could be if it is able to generate a compounded annual growth rate (CAGR) of 15% per annum or 1.25% per month, which is very much possible.

I have assumed an annual inflation rate of 9.96%, which is probable in India, where I live, but in the US it is very unlikely. So, if the inflation rate is 2% per annum, you will end up with a net future value of US$ 911,208, quite a significant sum.

Note: This is a reproduction of the question I had answered on the website ‘Quora’.

I have US$50,000 now. I want to invest in US stocks for 20 years. Which stocks will you recommend? How much would I have at that time?

Friend, I am glad that you are thinking of a 20 year investment horizon. None can suggest you a single stock that you can invest and forget about for 20 years. Of course there are stock of great corporations but at what price are they available in the market? If you buy the stock of an excellent company at a very high price, you as an investor will not benefit. Under the circumstances, You have two options before you, as follows:

1. You may learn ‘Value Investing’, in which case please buy the best book, ‘The Intelligent Investor’ by Benjamin Graham and get started immediately. You may visit my blog atValue Investing.

2. If you do not want to spend a lot of time on investing, you may simply invest your corpus in an ‘Exchange Traded Fund (ETF)’ that mirrors a popular index like DAX, Dow Jones, etcetera or any good mutual fund.

Now the most important aspect of investing begins. You simply forget about the investment till 20 years.

Following table shows what your investment could be if it is able to generate a compounded annual growth rate (CAGR) of 15% per annum or 1.25% per month, which is very much possible.

Future Value of Investment

I have assumed an annual inflation rate of 9.96%, which is probable in India, where I live, but in the US it is very unlikely. So, if the inflation rate is 2% per annum, you will end up with a net future value of US$ 911,208, quite a significant sum.

Which Are The Best SIP to Invest 3000 per month for two years?

It is wonderful to hear you say that you want to invest 3000 per month in SIP. The second part however is disturbing me. Why only two years? Why not 20 or 30 or 50?

The ‘Law of Miracle of Compounding’ can work in your favour and make you rich only when you have such a longtime investment horizon.

My guru, Warren Buffett created his extraordinary wealth over four decades!

Over such long periods of investment it does not matter which SIP is better. All will do more or less equally well. Make sure the organisation is sound will be around in business, without going bankrupt, over such a long period.

Note: This is a reproduction of the question I had answered on the website ‘Quora’.