Let us begin with a home question. What do you think is the most effective way to invest?

1. Timing the market

2. Staying with the investments long term

3. Asset allocation

4. None of the above

While timing the market and staying with investments long term are important, it is asset allocation that will ensure growth over a period of time. If you have said “Asset allocation”, that is the way to go!

Asset allocation is the process of dividing your investments into various asset classes.  While this term is generally used with reference to investments in the stock market, the term can be applied more broadly to cover the process of spreading your investments into different asset classes across the board–paper assets, immovable property, gold and so on. Within each class too, you must spread your assets into different asset categories.

For instance if you are investing in the stock market, your assets could be  invested in equity, debentures and bonds.  Equity investments in turn, should be spread over the several categories–real estate, pharma, oil, education, finance and so on… In other words, you keep drilling down till you have a portfolio that is diverse and the downside risk is reduced.  A fall in one industry will not wipe out your portfolio!

How does one determine the mix of assets? The decision is a very personal one and is determined by

a) the amount of money you are willing to invest;

b) what your financial goals are.

Risk averse investors may consider real estate or mutual funds a safe route.  Either investment type, offers convinient and cost effective ways of managing your assets with mimimum risk.  Further, if you look at the types of mutual funds available for investment you will find that there are a range of products and time horizons for you to choose from and create a diversified portfolio.  In real estate too, you can invest in land, house property or commercial property. You can invest long term or short term. You can choose the level of risk you want to have and so on. ..

Risk ready investors, can play the secondary market with short term or long term goals.

However, neither the amount of money you are willing to invest and your financial goals remain constant. They change over a period of time. It follows that asset allocation should also keep pace with your changing needs. So, you need to periodically review your portfolio and determine whether the asset allocation is just right for you at that point in time. You may have an addition to your family or you may be aging and your risk taking ability may have reduced for a variety of reasons.  You need to adjust your portfolio to synchronize with the changes in your life.

To conclude, you need to find the right balance for yourself.  You need to learn which investment suits you the best at a given point in time.

No and Yes. We are not fools because saving up for a rainy day is a wise thing to do. But yes, we are fools, because the way we are saving up is wrong.  The money we save up has poor velocity and returns are meagre. The winning formula has never been taught to us. Our parents did not know it themselves, so how could they teach it to us?

Look at the interest rate your bank offers you. It is about 2% in America and 6% in India.  Of course something goes into the Government coffers by way of tax and the rest is eroded by inflation. You get back a small sum or nothing at all, for all the pleasures you have forgone to save up that money. The bottom line is that you are not getting much for your pains.  At least the grasshopper had a good time.

The secret of getting somewhere quickly with your money is making sure that you understand money and its dynamics. You must learn to distinguish between assets and liabilities. You must learn to identify liabilities that are masked as assets and seeming liabilities that are really assets. For instance, if you have purchased a property with a loan and the rent on property repays the instalment of loan and also puts some money into your pocket, you have created an asset. If your house property draws money out of your pocket and puts nothing into your pocket, it is a liability.  Unless you are going to trade your smaller property in for purchasing a bigger property(taking advantage of prevailing tax laws) with a larger loan that pays for itself, the capital appreciation really does not count!  It will not create wealth for you.

If you cease to look at money as an object, a possession, you will begin to see that money is really an idea.  Ideas are made up of words and words have momentum and direction. They fulfil a destiny.  For instance, instead of repeatedly saying “I cannot afford something”, try saying “how can I afford it?” You will find that you begin to have ideas about how to make money and how to get money working for you.

It is also important to understand that it does not take money to make money. Money can be made out of –an idea, a concept.  Thereafter, you only need to work on the idea of geting your money to make you money! Look at the forward trading market and the stock market and you will realize that money can be made without investing money!

In brief, you need to change your mind set about money. You need to make your money work for you even if you work for money meanwhile.  Becoming rich and having enough money for the rainy day requires meticulous planning and compelte understing of the dynamics of money.