Let’s Understand Investing The Way I Teach It to My Daughter

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Teaching my daughter has always been about giving contexts. Be it about books, famous personalities, fruits, or toys. She understands the concept better when I relate it to something she is already familiar with.

 

For instance, planets in the solar system. She can differentiate among them because of her familiarity with different colors of Cadbury Gems. For her, the blue one is our Mother Earth. The red one is Mars. And so on.

 

Likewise, she identifies the book Chanakya Niti by its orange color. PM Mr. Modi by his white beard. Whatsapp by its green color. And several other things too.

 

On similar lines, for the past few months, I have been using an identical approach to teach her about investing, the financial world, and other related stuff. 

 

Citing different contexts, let’s dig further into it. 

 

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Emergency Fund is like storing a bucket full of water in your bathroom. It comes handy when the home taps run dry. 

 

Likewise, the real value of an emergency fund is understood when you get fired from a job. And the prospects of getting a new one appear to be dim. Thus, better to have plenty enough to manage at least 12 months of expenses. That too liquid. 

 

Moreover, if the Corona lockdown doesn’t motivate you enough to build it, I don’t know what really will.

 

Learning to Invest is like cleaning your own home. The gimmicks of mopping the dirt under the beds are learned only when you do it regularly.

 

Likewise, a focused intention of continuous learning keeps you ahead in the game. All you need is a calmer brain inside your head.

 

Compound Interest is like carving a 100m road out of a mountain. That too single-handedly using simply a hammer and chisel. Remember Dashrath Manjhi? The Mountain Man?

 

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Nothing substantial happens during the initial 1st year. Not even after 5. But something magical starts to happen when you add a decade to it. Something which is hard to observe in the short-term but difficult to ignore in the long-term.

 

Investing is like running an ultra-marathon. You can not conquer the results in just a day. To build endurance and required stamina, you need a plan and disciplined training.

 

And the same goes for investments too. You can’t just wake up from your bed all of a sudden, choose to invest in a stock, and wish to make barrels of money in a day. It’s a process that requires discipline and continuous learning.

 

Personal Finance is like painting a canvas. You can’t paint it with just a single brush. Each color stroke requires a different size. 

 

Likewise, every individual is born with a different set of financial goals. A personal preference for buying a house at the age of 22 may not go down well with someone who hates to carry debt on his shoulders.

 

In short, there is no exact formula. It’s always personal!

 

Asset allocation is like prescribing a medication. Different for different patients with different ailments. You can’t treat Acne with a Saridon tablet!

 

It’s always about priorities and risk tolerance capabilities. Someone at the age of 22 may choose 100% equity allocation. While a conservative young man may prefer a 100% allocation towards Gold or fixed-income assets.

 

Investing in a bull market is like eating your favorite chocolate. Whenever you munch it, you enjoy it before it ends.

 

Finding a multi-bagger stock is like studying a niche subject for years and then launching yourself in the middle of masters by publishing a thoroughly researched article. Interesting enough to grab their eyeballs.

 

Likewise, a single stock can help you build a fortune. Provided you have the conviction to hold and patience to go through its ups and downs.

 

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Sitting on cash is like being a kingmaker in a 3-way political fight ended up in a hung assembly. You have the power to strike when the wonderful bargains are served directly on your plate.

 

Remember Maharashtra assembly elections? Sharad Pawar? The Kingmaker.

 

Goal-based Investing is like boiling milk at different temperatures to prepare different dishes. Be it rice pudding, curd, cottage cheese, or milk cake. 

 

Similarly, set up different SIPs (Systematic Investment Plans) to accomplish specific goals as per the desired timeframes. The monthly amount invested towards retirement will be entirely different from what you invest to fund your car downpayment. Allocate the amount wisely. Diversify across different asset classes.

 

Financial Market is like a micro-climate of Mauritius. It keeps on changing. Good climate doesn’t last permanently. Bad weather doesn’t last forever either.

 

The same goes for the market too. 

 

Volatility in the market is like a monkey. It scares you with its character. But once you grow determined enough to brave it all with your behavior, it will never haunt you again.

 

Investment cost is like being on a junk-food diet. The more you manage to keep it less on your plate, the healthier is the reward in the long-term.

 

Long-term investing is like sitting on a 3-legged stool in a lift. All you do is take passengers up and down by pressing different buttons. In short, it’s boring in nature.

 

Timing the market is like spending your physical energy on pushing a wall with your bare hands. It’s worthless as nothing substantial really happens except draining your energy out.

 

Similarly, making buying and selling decisions by predicting future market movements is futile. Nothing extraordinary happens except a lot of stress, pain, and losses.

 

Recession is like a snowball. The more it rolls down the hill, the bigger it gets. Likewise, the recession turns deeper when the fundamental indicators are bowled out one-by-one.

 

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Firstly, demand falls. This leads to a drop in industry spending. To cut the costs, industries move towards layoffs. Jobs disappear.

 

Consequently, the ones who are still in jobs get worried and spend less. RBI cuts the interest rates to increase consumption. Govt. borrows to stabilize the economy. Stock portfolios turn red. Physical assets lose value.

 

And the cycle continues.

 

Economic Depression is like being born on a Leap Day (29th February). It’s rare. The 2nd last time it happened was in 1929. And the latest in 2009 when Greece slipped into a deep recession with more than 20% drop in economic output.

 

Predicting the stock price movement is like riding a scooter with your eyes closed while getting instructions from the pillion rider.

 

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No matter how well I explain, she doesn’t understand all of it. But that’s perfectly fine. Kids at her age don’t need to grasp that investing is a junction where different trains carrying emotions, numbers, psychology, and business models meet. It’s all about making her aware of different ideas.

 

By the time she grows up and starts using kids related products, she’ll be better equipped to understand the manufacturing companies behind such products.

 

That’s all, my dear friends! If you have any other better ideas, do share them in the comments section.

 

Image Source: Forbes

Inspired From: Explaining Investing In Ways That Make Sense

 

Dhruv Girdhar | RichifyMeClub

 

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RichifyMeClub
RichifyMeClub writes about value investing, developing the right mindset, following a discipline-driven process, human psychology, behavior patterns, and investment philosophies that work behind wealth creation.
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