Explain Investment like I am 5

We started with concepts of money, investment mindset and some rules to create wealth in the last blog. But even with that it might feel like the night before exams when considering about investing. So here is a cheat sheet so that you can sleep well and still perform good.

By the way, this blog is not for you:

1. If you are actually 5 years old.
2. If you have a ton of time to pick from equity market.
3. If your basic amenities are not met by your income.

Invest the way solar systems are made

• Stars – You cannot have a solar system without a star. And the star must be stable enough to let the planets form, and not wiggle away by their pull. Similarly, your majority of investment should be in a low risk – stable growth bucket. These are investments that you keep for a lifetime. Fun fact: most solar systems are binary; we are an exception.
• Planets – They are the next significant body in any solar system, they have much less mass than their star but enough to introduce some action. Your portfolio should also contain moderately risky assets, which give you the upward growth you need for your medium-term goals.
• Satellites – They are present, depending upon the size of planets – smaller planets cannot support satellites. If your funds allow you with leftover funds from investments in moderately risky instruments, you can consider investing a satellite
• Asteroids – These are like spec of dust in terms of the size of a star, and also are extremely unstable. They keep crashing all the time and you cannot accurately predict their trajectory. But you only need a lucky one to make your wishes come true.

Instrument Cheat Sheet

You might argue that there are a plethora of mutual funds ranging from low risk to high risk then how everything be categorized as one? True but here we are taking an average assumption.

Diversification Cheat Sheet (Age-Wise)

Pick a range based on your risk taking capability. Might not always add up to a hundred. The percentage here is the amount which you want to save from your income.

Example

Case 1

• Bob is a travel agent in his mid 50s. He earns around 2L a month and wants see the world for himself after his retirement. He lives minimally and is an aggressive saver. This is how he can use the cheat sheet:
• Out of his income he takes 30% (60k) of it for savings.
• Of his savings, he puts 80 % (48k) of it into stable stars like Liquid Funds.
• With the rest of 20% (12k) he invests in ETF for accelerated growth.

Case 2

• Alice is a yoga instructor, she is in her 20s and earns around 2L a month on average. She likes to spend a lot and live in the moment. Maybe this is how her diversification will look like:
• She puts 20% (40k) of her income into savings.
• She puts 50% of it (20k) in the form of Fixed Deposits for long term investment.
• She used around 30% (12k) of her saving into Mutual funds for medium term goals.
• She buys stocks with 15% (6k) of the savings.
• She is adventurous and puts around 5% (2k) into buying Bitcoins. Who knows, this could a multi-bagger.