4 Different stages of investing: Which stage are you in?

Table of Contents:

Why do I need to Invest?
When Should Start Investing?
What are the different Investment Options?
4 Different stages of investing: Which stage are you in?

• 1. Unconscious incompetence:
• 2. Conscious incompetence:
• 3. Conscious competence:
• 4. Unconscious competence:

Why do I need to Invest?

Did you know that though your money may be physically safe in a savings account, it may not be risk-free?

For instance, if you have Rs. 10,000 in a savings account earning 3% interest each year, in 20 years’ time your savings would be worth Rs. 18,061. That’s an absolute return of just over 80%. However, if inflation is about 7%, Rs. 18,061 would only be worth Rs. 4,668 in today’s terms!

Inflation eats away at the value of your money. And that’s why saving is not enough. You need to invest to pack power or grow your money manifold.

Sound investing is grounded in an investment plan that is based on your personal circumstances. You can put it together on your own or with the help of a financial adviser. 

A typical financial plan includes important stages like: 

• setting your financial goals, 
• defining your time horizons to achieve them, 
• discovering how much risk you can withstand, and 
• in fact, diversifying risk, by investing in a range of investments such as cash, bonds, equities, and other assets.

When Should Start Investing?

The earlier, the better. The sooner you invest, the more time your money will have to grow as you benefit from “compounding” or the snowball effect on money – when the interest on your investment also starts to grow. 

If you delay, you will probably have to invest much more to achieve a similar result.

Here is an example that demonstrates the difference time can make to your savings:

If you started investing Rs. 5000 a month on your 40th birthday, in 20 years’ time you would have put aside Rs. 12 lakhs. Growing at an average of 7% a year, it would be worth Rs. 25,52,994 when you reached 60. However, if you started investing 10 years earlier, your Rs. 5000 each month would add up to Rs. 18 lakhs. 

Assuming the same average annual growth of 7%, you would have Rs. 58,82,545 on your 60th birthday!

What are the different Investment Options?

Different investments suit different people at different stages in their lives. And each one has its own level of risk and reward. The basic rule of thumb: The greater the risk, the greater the potential reward. And vice versa.

Here is a broad description of some investment options:

Gold and Real Estate are traditional investments and due to their ‘physical’ nature are not liquid.

PF, PPF, NSCs, and Post Office Savings are long-term national savings avenues that help you save for retirement besides offering tax benefits.

But when it comes to true blue financial investments, there are three main asset classes:

Cash

Usually, cash is held in a savings deposit. Though it’s a safe place to park money you may need in the short term, it offers low prospects for growth in the long term. In reality, your money could even be “robbed” by inflation. For instance, the rate of inflation right now is about 9%. A standard savings account offers you a 4% return. It’s that easy to spot the thief called inflation at work on your savings!

Cash or Money market funds could increase your returns as you could benefit from better interest rates that you would not have been eligible for as an individual investor.

Bonds

A bond is a loan to the government or to a company. So you receive interest until the maturity date. Bonds can be a good way to generate regular income but there is a chance that the borrower may miss an interest payment, or in some extreme cases, not pay back the loan at all. This risk is minimal with government bonds but can be higher with some corporate bonds.

A bond fund can help you benefit from the complex world of investing in government and corporate bonds.

Equities

Equities are another name for shares. If a company does well, the value of your shares could go up. However, the value of shares or equities can go down as well if the company does not do well. Over the long term, equities offer significant growth potential but tend to fluctuate in the short term.

You can invest directly in individual companies, but if you’re not equipped to research the companies you would like to invest in, you could choose to invest in an equity mutual fund. Your investment will be spread across many different companies and will be professionally managed.

4 Different stages of investing: Which stage are you in?

Let us think of the moment when we first began learning a car. What things come to mind thinking about first learning to drive a car, or any say any vehicle for that matter? Cautiously braking, keeping a close watch on the speedometer, very awkwardly raising your speed, and feeling anxious to merge into the freeway.

These were a few things that made you gain mastery over the task. Now, as you have achieved the desired skill-set, you can do all these tasks unconsciously while listening to music, talking on the cell phone, or even putting up your make-up. Thus, driving changed from a conscious process to something that you can do competently and with the skill set gained, without requiring much effort.

Reading all this, you must be wondering why am I sharing all this when I should be talking about learning the steps for building a strong investment portfolio. Profitable investing, I believe, is not an unresolved mystery anymore. It is a process similar to learning any common activity like an infant learning to walk, a child to ride a bicycle, or an adult to drive a car. Let us now understand each of the four stages in making consistent and profitable investments, and things to do and learn to reach the next profitability stage.

1. Unconscious incompetence:

At this initial stage, one is not aware of his incompetence. To understand better, you may not know about what you do not know. Therefore, at this level, everything may seem new to a beginner as so much of it is unexplored and unknown. This may cause a lot of anxiety as well as failure risks. Usually, anxiety may cause easy reliance on others’ investment advice.

As unconsciously incompetent, you may have no particular investment plan, irregular profits, or even suffer losses at times. Thus, this stage can be marked with little concept of being on the path of wealth. Statistical evidence show that a good number of investing population, i.e. around 60-80% are stuck here at stage 1. In short, this stage can be precisely described as financially obvious.

2. Conscious incompetence:

In this stage, one learns enough to know about his/her incompetence. This is the first step towards passive investing and the realization of the fact that there is so much more to becoming consistently profitable. You may aspire to create wealth, as well as play the game of getting financial freedom. However, a strong knowledge base, investment skills, and risk management are still missing from your game plan.

At this stage, you may not understand what causes profits and losses in your portfolio with the changing times. This might let you put the blame on things such as the tough market conditions prevailing, your broker’s investment advice, or any other causes outside your domain. This stage makes your entry to the road to wealth, still having lots to learn.

3. Conscious competence:

At this stage too, you are still a learner, not a master. You know enough of the investing game to be comfortable in the same. However, there is still a lot to work on. This stage may be accompanied by a solid investment plan, and its execution as well. It is based on proven principles leading to success. Still, your approach is not grounded in risk management, and the plan complexities are still left to gain expertise in. This may cause faults and losses occasionally. These occasional and unexpected hiccups may be disturbing, and point to a higher knowledge level that can turn out to be consistently profitable.

4. Unconscious competence:

This is the final stage of gaining knowledge. Here, you have competent subject knowledge that it may become your new comfort zone. Investing here is primarily an administrative task. Here, you need others’ advice only for getting factual investment information rather than establishing your base on the same. You may become really financially independent by this stage, regardless of your current net worth. We can characterize this stage as someone knowing the complexities of investment strategies. By this stage, you have mastered risk management skills and can go ahead with creating a consistent and profitable portfolio. Wealth, here may be just a matter of time.

The above-mentioned step-by-step process can lead one to become a more consistent and profitable financial investor. One should base his/her wealth plan on verified and grounded investment techniques, in order to confirm their goals and values.

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