Investing is the act of buying assets today so that we can get some income (dividend, interest, rent) and some appreciation while selling it. So, we can buy shares, bonds, mutual funds, gold, and Real Estate – and get income and appreciation in return.
When we buy shares, we get dividends and we get an appreciation of the share price. When you are young and building your portfolio, you should be buying shares in companies that are growth-oriented. The reason for this is very simple – you have current income and you do not need the investment income.
So let us say you start building your portfolio (of equity shares) at age 24. You should be buying good growth shares, in your 40s and even in your 50s you should start looking at good dividend yield shares.
One way of ensuring that you never run out of money in retirement is to build an equity portfolio where your dividends are greater than your day-to-day expenses.
As the dividend growth is mostly higher than inflation, the higher expenses will be met by increasing dividends. However, you should also have a debt portfolio, which is the ‘Go To’ place for liquidity when the markets are weak or down.
The advantage of building an equity portfolio for creating wealth has its advantages. Initially you get dividends (cash cannot be faked for too long). Or when you are young you invest in small companies with more growth prospects. Then in your 30s you start buying some shares that pay dividends too. Now you start building your ‘Retirement Portfolio’ – so that you know when to retire.
At some stage when your dividend income is greater than your expenses, it is a great signal to retire. You are now what we call ‘Financial Independence’ – financial independence is the first two words in F.I.R.E – Financial Independence to Retire Early. Now you have the choice of retirement. Financial Independence does not mean you have to retire. It means you can retire.
When you reach your age of ‘X’ – the age when your dividend income is greater than your expenses, you must realise that the base portfolio cannot be touched till you are at least 70 years of age. Knowing how much of one asset class you can sell and when is not easy to know. If you are drawing down from a portfolio, you need to know the ‘Bucket’ theory of knowing from which bucket how much to invest.
If you do not know this, please get an advisor – age 55 is too late to learn on your own. You do not have time to go back to a job in a worst-case scenario. So, build your direct equity portfolio, do a SIP in a Multi-Asset fund, and continuously learn about investing, personal finance, medical and life insurance. This is applicable to women as much as to men around the world. Health, wealth, cooking, leisure and hobbies – all these are life skills that are not taught by the education system, so it becomes the duty of the parent to initiate these skills. It is for the kids to learn and appreciate these things.
PV Subramanyam
writes at www.subramoney.com and has authored the best-seller ‘Retire
Rich - Invest C 40 a day’