Can I earn my living from my investments?

There have been these discussions in India for a while now about FIRE [Financial Independent Retire Early] movement. Thanks to 'Multiply by 25' rule and 'the 4% rule'.

For those who don't know what it is - Mathematically it is proven that if you could save '25 times money' as that of your 'current annual expenses' and thereafter keep redeeming just 4% of it while your portfolio is growing at assumed rate of 7%; then you won't have to work for money anymore (for at least 30 years, adjusting the rate of inflation at 3%).

Of course, when anybody (including myself) get to know about this, surely he/she dreams for this someway or the other and the questions arises - Is this practically possible?

Today we'll try to answer this by taking all possible facts into consideration and more importantly, we'll try to explore if at all, we should have such crazy aspirations from beginning of our investment journey.

Welcome to PersonalFinGuide - your personal Smart Finance Assistant. In earlier 5 article series, we discussed about basics of Monthly cash-flow, pre-investment checks, the real Investment insights and tax planning. This article is dedicated to that trending FOMO-headache gifted by Internet to Investment newbies. Can I earn my livings through my Investments?

Let me start with a story...

"Few years ago, a friend of mine, opened a DMAT and trading account for first time. He was pretty excited to do his first trade and book some real profit. Cliché isn't it? Everybody thinks so... So what he did was some mathematical calculations. His discount broker told him that the total brokerage he had to pay was 0.02% or Rs 20/- (whichever is less) for intra-day, while Delivery was free. No need to mention that he opted Delivery, but his budget was so less that he could go for just 1 share of a blue-chip company. So he bought the scrip, kept it for a week, tracking the gains 6-7 times a day. (Yeah it happens in the beginning xD.) Next Monday when the markets opened, he saw the massive gains of Rs 11/- , amazing isn't it? Immediately he placed a sell order to 'realize the gains'. That night he couldn't sleep well as he was busy calculating the expected 'available balance' for next day after the trade settlement. Yeah not once, but in a loop. Dreaming how he could continue this 'strategy' and make millions!! Next day, guess what happened? Forget profit, he lost around 9/- rupees in the trade.

Then he came to me complaining how he was 'looted' by the broker with hidden terms & conditions, resulting into his 'financial loss'. After 25 minutes of his story-telling I understood what happened exactly and I asked him to check the 'Contract Note' for the trade. (Brokers do send this every EOD when you do any trade). As expected, it turned out to be the 0.1% of STT, 18% GST (on brokerage) and Rs 18.5/- of transaction handling charges. So even if he saw Rs 11/- as gain on paper, there were deductions of approx. Rs 21-21.50 in the trade resulting into said loss."

What did we learn from this story?

Pretty straight forward - calculations always go wrong when done without taking all relevant facts into consideration. Now, can I say that the same applies to our today's topic? I know this might hurt feeling for many of you, but let's be honest - Finance doesn't run on feelings & emotions (always), it needs real facts and figures to support and of course, some amount of favors from uncontrollable entities (including policy makers, etc.).

Mathematically, we can prove some simple rules and equations about how you can be financially independent. But we must take few more practical and complex equations into consideration for the theorem to come to life. For example, in India we have something called 'LTCG & STCG Taxes'. When we say investments will take care of my expenses, we are actually saying we would do redemptions of our portfolio gains to fulfill our needs. When we are redeeming the gains, there comes the 'Gains Tax'.

Then there is something called inflation. The amount you need today for your basic needs is inevitably going to increase over a period of time. That is why I mentioned that 'the 4% rule works at least for 30 years time' and not forever. The rule itself is based of historic data to assume the consistent gains of 7% every year on the portfolio while the inflation be around 3%. What if this inflation rate spikes in a particular year? What if there are market corrections in particular time span, like we saw one in March 2020? So the calculations we had earlier are not 100% flawless, at least in India.

Ok enough flaw counting!! The goal here is not to put you down from the idea of investing but to make your investment goals more realistic, which will be a good start of your guilt-free investment journey

So what is realistic goal, you would ask... I have another story.

"I know a person who has a pretty inspiring story. He had a very humble beginning in the investment field and he always says one thing about risky investments - "Protecting money is more important than making money. In any instrument, one should know the ratholes where he/she can loose money just like knowing how he/she can make money." To explain this well, he shared his own story. When he completed one year investing in stock market he wanted to check where he stood. Being a banker, he went on reconciliation and found that he did total 91 Transactions out of which 68 were buy and 23 were sell. This cost him approximately Rs 670/- in brokerage and all related charges. (Remember - the brokerage, exchange charges, annual fees are the ratholes for stock market investments. The more number of transactions you do, more you pay.) After the complete reconciliation he found that the profit he made on his capital (20% of his annual income) was big enough that it could serve him a fancy dinner everyday for next 1 month. I know it's not so fascinating but try to understand, this is a newbie's P&L book."

So what am I trying to tell you here is - as a beginner, don't set such a massive goal. By realistic goals I mean, set a goal to gain profit in six months time as small as it'll pay off your 1 month electricity bill or one dinner or anything like that.

Right now you don't really need to think if you can rely on anything other than your current income source. Whatever you are doing, a job or a profession, it is already taking care of your bread & butter. The investments you do are for longer horizon and if you do it wisely, definitely it will grow into something you can count on.

Till that time stay focused & be a disciplined investor. I wish you happy investing and wealthy retirement!! :)

#investment_goal #financing_independence