Investment Diaries: Investment Strategy

How much do I invest in stocks?

A very common question in the mind of new investors is how much do I invest in stocks? There can be multiple strategies to figure this out, but my favorite is by the method of goal setting. To understand this, let's look at two very simple & extreme investment strategies:

Strategy-1

How about all I have (all in)? Too risky, stock market is not a lottery game and should not be played like one. Rarely will you succeed. Most likely you will be taken out immediately by the more experienced players in the market. And being fully invested, you don't have a Plan-B. You are screwed :)

Strategy-2

Ok, let's play it very safe then and invest only as much as I can afford to loose completely. Good strategy? No, unfortunately meaningless. Remember you are not in stock market so that you can afford a family pizza outing every weekend. You are here to become rich, truly rich or even vulgar rich.

Show me with an example, what do you mean?

Let's say you are a master investor and can manage 30% CAGR on your investments. If you follow Strategy-2 and invest meager amounts, you will end up with meaningless profits. The table below shows what you get by starting with Re 1 at the end of 20 years at 30% CAGR. Rs 148.6. Will that change your life? For the same variables, if you start with Rs 1 lakh, you end up with approximately a crore and half. Sounds like a decent amount?

20 Year ROI Table at 30% CAGR (in Rs)

So Should I start with one lakh?

No, reverse engineer your requirement. Start with what you would like to have and by when. Assume a reasonable ROI of 20-30% (below this you are better off with fixed deposits and corporate bonds, above this you are fooling yourself. Miracles do happen but let's not assume it will).

So let's say you need 4-5 Crores in the next 15-20 years, then what do you start with? simple.

So to conclude ...

Above example is purposefully simplistic to demonstrate one of the many possible thinking processes to figure out how much capital investment to start with in stock market. Practically in real life, you will have diversified investments spanning a combination of real-estate, gold, fixed deposits, mutual funds and stocks (maybe sheeps too, I mean anything you have a fancy for. I collect rough opals) and you would follow a systematic investment plan spread over a period of time with small installments invested periodically. But you get the idea, you are smart !