How small investors can build big wealth over time
Source: Live Mint
Small investors often feel intimidated by the fancy jargon financial experts use. But you don’t need to understand all that to build Big Wealth. All you need is a solid investment plan, the discipline to avoid critical mistakes, and the patience to stay on the course. If you stick to these basic principles, you’ll likely do better than most people out there. Let’s dive into each step in more detail.
Building an investment plan
As the saying goes, failing to plan is planning to fail. A solid investment plan will guide your decisions every step of the way. If you need to consult a financial advisor during this stage, don’t hesitate—it will be worth the cost. Not having a well-thought-out plan is like entering a dense jungle without a compass to guide you through.
The first step of building an investment plan is to set realistic expectations. People basing their expectations from the market based on its recent performance are setting themselves up for disappointment. Your expectations should be grounded in the long-term performance of the market. Historically, equity markets have delivered average returns of 12–15%, while debt instruments average around 8%. If you have a balanced portfolio with a mix of equity and debt, your returns will likely fall between the two.
The next step is to define your goals. In the pursuit of more money, we sometimes forget that money is not an end in itself—it’s a tool to get the things that you value. Write down your objectives. Are you investing for your child’s future education, their marriage, or your retirement? Clearly defining your goals is crucial because it will determine how much risk you can afford to take, which brings us to the next step.
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Determine your asset allocation. Your asset allocation should depend on your risk appetite, which, in turn, depends on your goal’s importance and investment horizon. A portfolio that is 100% equity is the most aggressive, while 100% debt is the least aggressive. If your goal is less important or your investment horizon is long, you can afford to be more aggressive. Conversely, if your goal is a very important or your investment horizon is short, you should adopt a more defensive approach.
Finally, you need to make investment selections. Where will you invest? Will you opt for a passive index fund or an actively managed fund? Will you invest in mutual funds, ETFs, or individual stocks? There’s no one-size-fits-all, the answer depends on your personal needs and preferences.
With a solid investment plan in place, the next step is to avoid costly mistakes and distractions.
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Avoiding the noise
We live in an information abundant word, where something is always screaming for your attention. Let me make this clear as clear as possible—most of the information out there is irrelevant and can do more harm than good. The closely you follow financial news, the more tempted you’ll be to act on it—and this can hurt your long-term results.
In a situation like this, where I feel tempted to withdraw money or deviate from my investment plan, I always recall this post from Morgan Housel:
Staying the course
You need to stay disciplined. Good investing is boring. I love this quote from Paul Samuelson:
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
You should track your portfolio’s performance periodically—quarterly, semi-annually, or annually. Avoid checking it too frequently, like daily or weekly, as this can tempt you to make impulsive decisions and deviate from your investment plan.
When you assess your portfolio, make sure to evaluate both returns and risks. It’s easy to overlook the risk factor especially when markets are performing well, but remember—risk and return are two sides of the same coin. Managing risk is what protects your portfolio when the market inevitably enters the rough patch.
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Lastly, you should rebalance your portfolio at least annually. Market changes can shift your asset allocation away from your original plan. By rebalancing, you reset your asset allocation back to the desired level.
Building wealth as a small investor doesn’t require complexity or constant action—it requires a clear plan, avoiding distractions, and staying disciplined. Stick to these principles, and over time, you’ll be amazed at how far they can take you.
Vivek Sharma, a seasoned professional in trading and investment with 20 years of experience, is a key member of the founding team at Gulaq.
