George Miller. In 1956, the Princeton psychologist figured out the magic of number '7'. He theorised that the number of objects an average person can remember is 7. It is probably the reason financial experts recommend that you should not have more than 7-8 funds in your portfolio. But it doesn't quite explain why equity investment for over seven years brings down the probability of loss. Or why the world is governed by 7, from the colours in a rainbow to days in a week and notes in music. Or even the reason why the proverbial seven-year itch sets in a marriage.
What it has done is help us figure out the magic of number '7' when it comes to personal finance. The itches that can set in if you ignore the crucial periods of financial decision-making. The liabilities you can incur, the retirement kitty you can run out of, the mistakes that can bloat into losses, the loans that can become difficult to manage, or the children who can grow up to make flawed financial decisions because you didn't teach them money skills at the right age. These periods may not be a precise seven years, but hover around this magic number. "There are many such rules and calculations built around the number '7' in finance. For instance, it has been observed that if the market suffers a 7-10% dip, it is bound to witness a steep correction
While we do not aim to scour for all such rules or periods, we do intend to tell you how to avoid the problems you are likely to face. Go through the following pages to understand how to take the right financial decisions during specific periods in your life, be it after getting a job or having children, after retirement or while investing in equity. We hope it will not only help you become a better investor, but also enhance your riches over the years. With a little magic that the number '7' weaves for you.
ITCH 1 : QUITTING EQUITY INVESTMENT BEFORE 7 YEARS
This is an itch that is consistently suffered by most investors and is well-documented. If you invest in the market in the form of stocks or mutual funds for short durations, or buy and sell erratically while trying to time the market, there is a good chance that your portfolio will be in the negative. This is because it has been proven historically that if you remain invested for at least 7-8 years, your chances of making a loss are minimal.
Staying invested in equity for more than 7-8 years diminishes the probability of loss considerably, while that of making gains increases dramatically. This has been observed in an analysis of equity funds in the Indian market between 2007 and 2017, where the probability of loss reduced to zero beyond seven years. "In fact, if you look at any block of seven years in the market, you wouldn't have lost money,"
quity markets between 1970 and 2017, by research and analytics firm Macrobond, suggests that the probability of loss falls beyond 7-8 years and drops to zero beyond 11.1 years.
We believe that short-term investments affect behavioural decision-making and leads to emotive reactions. This means that you end up taking bad calls and fall prey to the vagaries of volatility,"
On the other hand, if you remain invested for 7-8 years, you behave in a less emotive manner. A longer-term investment also means that volatility reduces considerably, increasing your chances of gain,"
ITCH 2: NOT INVESTING FOR 7-8 YEARS AFTER GETTING A JOB
In many ways, the first 7-8 years after you are employed and start earning are the most crucial and can decide the course of your entire financial journey. "The investor's biggest ally is time and there's no better time to start investing than to do it as early as possible," says Sunder. This is because you can take more risks, have greater flexibility to choose products, and have a better opportunity to save due to fewer liabilities at this stage in life.
Besides, you can make yyour money grow through the power of compounding. Compounding means that the interest you earn on your savings keeps earning its own interest. For instance, if a 25-year-old starts saving Rs 2.4 lakh a year, he can build a corpus of Rs 10.9 crore in 35 years at 12% return. However, if he doesn't start investing till he is 35, then to build the same corpus he will have to increase the investment nearly three times or will amass only one-third of the corpus. That is, he will be able to build only Rs 3.4 crore instead of Rs 10.9 crore.
TAKING CAR LOAN FOR 7 YRS OR HOME LOAN FOR 7-10 YRS
NOT TEACHING 7-14 YEAR KIDS ABOUT MONEY
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