The 8-4-3 Rule and The Snowball Effect

Posted on Tags ,

The 8-4-3 Rule and the Snowball Effect

The 8-4-3 rule is a simple yet powerful concept that can help you visualize the exponential growth of your investments over time. But to truly harness its power, you need to understand the concept of the snowball effect.

The Snowball Effect

Imagine a snowball rolling down a hill. As it rolls, it picks up more snow, growing larger and larger.
Similarly, your investments can grow over time, picking up more returns as they compound.
As per this thumb rule, the first 8 years is a period where money grows steadily, the next 4 years is where it accelerates and the next 3 years is where the snowball effect take place.
When you combine the 8-4-3 rule with the snowball effect, you create a powerful force for wealth creation.
For Example
Assume, one having monthly salary of 1.5 Lakhs and he invest 45K( 30% of income) in SIP.
Assume 12% return.
In First 8 years, investments will reach to 72Lakhs
Next 4 years, investments will reach to 1.45 Cr
Next 3 years, investments will grow to 2.27 Cr
Illustration of Snowball effect in Investments

**How to Make the 8-4-3 Rule Work for You**

1. Start Early: The earlier you start investing, the more time your money has to grow. Even small, consistent investments can yield substantial returns over the long term. Aim for investing at least 20-30% of monthly income.
2. Choose the Right Investments: Equity mutual funds are a great option for long-term wealth creation. They offer the potential for high returns, but also come with higher risk. Hence, asset allocation plays a vital role.
3. Stay Disciplined: Stick to your investment plan, regardless of market fluctuations. Consistent investing is key to reaping the benefits of compounding.
4. Review and Re-balance: Regularly review your portfolio to ensure it aligns with your financial goals and risk tolerance. Re-balance your portfolio as needed to maintain your desired asset allocation.

By understanding the 8-4-3 rule and the snowball effect, and by taking action early, you can set yourself up for a financially secure future.

Remember, every small step you take today can lead to significant rewards in the future.
Although investing poses risks, such as market declines, not investing also can be a risk to your financial future.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Seek professional advice to mitigate such risks and make informed investment decisions. Numbers given in this article are for illustration purpose only.
10 Common Mistakes

10 Common Mistakes Mutual Fund Investors Make

Posted on Tags ,

10 Common Mistakes Mutual Fund Investors Make

Here are 10 common pitfalls that mutual fund investors often fall into:

  1. Not Investing:
    • Why it’s a mistake: Delaying investment or not investing to one’s full potential can lead to missed opportunities and the power of compounding.
    • How to avoid it: Start investing early and consistently, even with small amounts atleast 20 to 30% of income.
  2. Following Friends and Relatives:
    • Why it’s a mistake: Everyone’s financial situation and risk tolerance are different, hence copying the portfolio of friends or relatives are not ideal way of investing. Every person has different goals and risk appetite.
    • How to avoid it: Consult a financial advisor/coach to make informed decisions.
  3. Trying to Time the Market:
    • Why it’s a mistake: It’s nearly impossible to consistently predict market highs and lows.
    • How to avoid it: Adopt a long-term investment approach and use Systematic Investment Plans (SIPs) to invest regularly, regardless of market conditions.
  4. Lack of Diversification:
    • Why it’s a mistake: Concentrating your investments in a few funds increases risk.
    • How to avoid it: Diversify your portfolio across different asset classes (equity, debt, hybrid) and fund categories (large-cap, mid-cap, small-cap etc). Limit the exposure to thematic/sectoral funds not exceeding certain thresholds based on Risk appetite
  5. Ignoring Inflation:
    • Why it’s a mistake: Inflation erodes the purchasing power of your money over time and a biggest enemy of common man/Investors. Assume if average inflation is 6% and if your investments yield only 5% after Tax, is your investment really growing ?
    • How to avoid it: Invest in funds that can potentially outperform inflation, such as equity funds. Keep aside emergency funds or money required for short term goals  in Debt/Liquid/Fixed Instruments.
  6. Chasing Past Performance:
    • Why it’s a mistake: Many customers often refer past performance as the base criteria to pick a fund. Past performance is not indicative of future results. Market conditions and fund management can change.
    • How to avoid it: Focus on a fund’s long-term track record, rolling returns, standard deviations, investment strategy, and fund manager’s experience, AMC(Asset Management Company), underlying portfolio, Risk-O-Meter, Suitability, strength of research team etc.
  7. Emotional Investing:
    • Why it’s a mistake: Impulsive decisions based on fear or greed can lead to poor investment outcomes.
    • How to avoid it: Stick to your investment plan and avoid making hasty decisions.
  8. Not Reviewing Regularly and Rebalancing:
    • Why it’s a mistake: Over time, your portfolio’s asset allocation can drift from your original plan.
    • How to avoid it: Regularly review and rebalance your portfolio to maintain your desired asset allocation.
  9. Not Seeking Professional Advice:
    • Why it’s a mistake: Investing without expert guidance can increase the risk of making mistakes.
    • How to avoid it: Consider consulting with a financial advisor to get personalized advice.
  10. Ignoring Risk Tolerance:
    • Why it’s a mistake:  Investing in funds that are too risky or too conservative can lead to suboptimal returns or unnecessary stress.
    • How to avoid it: Assess your risk tolerance and choose funds that align with your comfort level.

By avoiding these common mistakes, you can improve your chances of achieving your long-term financial goals through mutual fund investments. For more details, please contact us.

10 Common Mistakes

5 Bad Investment Habits You Should Give Up

Posted on Tags

It is important to change certain bad habits and choose to start off with good ones to improve our life. We should all resolve to apply this to our personal finances as well.

Below are a few financial habits that can be very costly in the long run, and we must try to give up on:

  1. Chasing Quick Returns:

The allure of quick profits can lead to impulsive decisions and risky investments.

Seasoned investors are always patient concerning their money and they tend to stay away from the madness of the crowd. Like great wine and whiskey, the fruits of investments get only sweeter with time. Hence, make it a habit to ignore the short-term fluctuations in the market and stay focused on the long term.

We should resolve to give up these bad habits and inculcate good ones and make them a way of life.

 

2.Taking Investment Decisions Based on Tips From Friends And Relatives

Relying on anecdotal advice can lead to poor investment choices.

We all have that set of relatives or friends, who are self-proclaimed investment gurus. Usually, people who have been tracking the markets and investing for many years without any professional knowledge or guidance, believe that they actually ‘know-it-all’, and generously start imparting their knowledge on ‘how you can double your money’ or ‘how investing in the stock market is a gamble and you should invest only in safe asset classes like Gold and Real Estate.’ Often, we get influenced by their views and take their suggestions as and when it comes to personal money matters; we tend to rely on people whom we know and trust. 

However, it is very important to differentiate between a qualified Financial Coach and a person who is giving suggestions based on his experience as an investor.  Even the most renowned sports persons often rely on coaches to help them reach their peak performance.

 

  1. Making Ad-hoc Investments

Simply setting aside some amount as savings is not enough. All investments must be made with a purpose in mind. ie, Goal Oriented investment approach. 

Take the help of a qualified financial advisor to list out your life goals and how to Prioritize, Plan (how much you need to save) and Invest (where to invest) to achieve these goals. Periodic reviews will also ensure that you stay on track towards achieving your goals.

  1. Spending Sporadically  and  not having a Savings Budget

Impulse purchases and a lack of financial planning can hinder your ability to invest consistently.

Most people spend first and then save and invest what is left. This way of managing cash flows leads to unnecessary expenditure and eventually we land up saving less. We recommend a strategy of first setting aside a portion of your income as savings towards your goals, and then spending the balance amount guilt-free. This will ensure that over a period, you build a sizeable corpus, through steady investments and streamline your monthly expenses. For example, by saving mere Rs. 5,000 per month in equity-oriented investments for long term, you can accumulate a corpus of Rs. 1.62 Crore, over a period of 25 years.

  1. Panicking During Market Corrections:

It’s natural to feel anxious when the market drops,but selling in panic can lead to significant losses.

Many investors may fear losing their hard-earned money and may panic and sell their investments.

However,this emotional response can often lead to poor investment decisions.

Stick to Your Investment Plan, Develop a well-thought-out investment plan and stick to it, even during market downturns. Avoid making impulsive decisions based on emotions.

“We are what we repeatedly do” Aristotle (384-322 BC)

 Credits: Parts of the Blog is from the article published by Amar Pandey, CFP