After my last post some people mentioned why I don’t lay emphasis on asset allocation. I am not a financial planner so I wont be able to comment on that.
This blog was started so that people, who are my son’s age, learn the basics of money and how to make money work for them. Unfortunately our education system doesn’t teach this.
The idea of financial freedom is the ability to choose what you want to do in life, rather than money dictating what you “have” to do.
With that in mind there is no doubt that equity has been the biggest compounder over the last 30 years in India. Even if you just invested in the BSE Sensex alone you would have compounded about 15% over the last 30 years. If you remember the maths from my earlier blog…that would mean that 6 periods of 5 years. By the rule of 72, every 5 years the money doubles. So in 30 years 10000 invested becomes 640000/-
My advice to my son and others his age (in the early 20s) is very simple. If you can invest about 60% of your income, only in equity over the next 10 years…you can be financially free to do what you want after the age of 36.. The type of equity that you choose can vary.
Assume you are 21 years of age and earn Rs 500000/- per annum and every year get an increment of 10%….you invest 60% of your income – i.e Rs300000/- per annum. If you invest and get 15% return then every 5 years this amount doubles…by the age of 36 this amount will become 24,00,000/-.
For the next year you could save 330000/- by the age of 36 this amount will be close to Rs23,30,0000/- . The next year’s number will be Rs22,00,000/-. At the end of the 15 years, you will have more than Rs 30000000/-. (Rs30 million!!) as your asset base.
This does not mean you won’t work after the age of 36….but when you have this kind of an asset base, you will do the work that you love.
Asset allocation for these young people can be thought of later. The India growth story has along runway in my opinion. At this young age I would not like them to play defensive because even small interest rate differences, can make a huge difference in their wealth.
If you are interested there are blogs by J L Collins and Money Moustache which I have found very interesting. While they talk with respect to the US market the underlying concepts remain the same.
You can retire by age 36 and do what you love.