Most of us spend more than half of our lives working and saving money. However, most of us spend almost no time planning to make that hard-earned money work more effectively for us. Your success as an investor depends upon your ability to choose the right investment options. This, in turn, depends on your needs, wants and dreams.

I would like to discuss some investment basics that every investor should know while planning their investments. Investment planning isn’t a way to get rich quick, but is a disciplined execution of your lifetime plans.

Investment - Consumption Cycle

By making an investment, you are using money that could otherwise have been consumed. You are sacrificing the pleasures of buying a car, taking a vacation, renovating your home etc. There ought to be some reward for this sacrifice. The reward is that you expect to get back more than what you have put in. You can then consume the amount that you get back. Thus investment refers to a commitment of funds to one or more assets that will be held over some future time period. In simple words, anything not consumed today and saved for future use with some risk can be considered an investment. Thus future consumption is the main motivation of an investment made today. Investing creates wealth and wealth is a driver of consumption. More wealth means more consumption, while less wealth leads to less consumption. Thus all the three: investment, wealth, and consumption are interrelated. This is the investment consumption cycle.

Why do you invest?

You invest for your future well-being and to meet future financial requirements. Anticipated future cash outflows may be in different ways like: children’s education, children’s marriage, buying a home to retire in, etc. There can also be unanticipated cash outflows like: critical disease, accident, natural calamity etc. Thus, investments are made to protect the family against all these anticipated and unexpected cash outflows. The funds for investment comes from assets already owned or borrowed money or savings.

How do you invest?

If you make an investment decision today that will directly affect your future wealth, it would make sense that you make a plan to guide your decisions. Surprisingly, the majority of people do not have in place any type of formalized investment plan. Taking some time to put together an investment plan can reap tremendous benefits. You must have a strategy for your investments backed by a sound reason for investing.

Where do you invest?

Investment can be made into different financial and non-financial asset classes. Financial asset class includes paper assets like:

• Equity shares
• Mutual funds
• Bonds
• Cash equivalent, such as gold, or other precious metals

And the non-financial asset class includes investments in:

• Land and buildings
• Plant and machinery
• Business

And finally, “Be an investor, not a speculator!”…

Investors are defined as: Individuals who purchase assets for the conservation of wealth and the increase of wealth, with the emphasis on the conservation of wealth.

There is another breed of people, speculators, often mistaken as investors. Let us understand speculators - They are individuals who purchase assets for the conservation of wealth and the increase of wealth, with the emphasis on the increase of wealth.

In simple words, ‘Investment is safe speculation and speculation is hazardous investment’. There is a saying in equity markets that, “Those individuals, who invest, make money for themselves and those who speculate make money for their brokers.”

Priyesh Shah is Chief Financial Planner, working with SRE Financial Planners.