Investment Triangle - Discipline & Time

Knowledge, Discipline & Time are the 3 vertices of an investment triangle. In this issue, we are going to examine the next 2 vertices of the investment triangle – Discipline & Time.

Discipline is easy when imposed

Discipline in investing is an essential ingredient to successful investing. When we stay invested in a right asset over a longer duration, it certainly pays off. Let us take Suresh, a teacher, who has a home loan EMI to pay for 15 years. Only if he pays his monthly EMIs regularly without fail, he could own the property at the end of the loan tenure. Paying a monthly EMI is a huge commitment and requires discipline on part of the investor.

Similarly, take Sara, a lawyer, who pays the premium for her parent’s health insurance policy. Only if she pays the annual premium in a disciplined manner, her parents would be able to avail the hospitalization benefits. Most of us diligently pay our periodic payments in a disciplined way, like Suresh & Sara, so as to enjoy the asset(s) or facilities as required.

In both these cases, discipline is imposed on them by a third party (Bank or Insurance company) to make payments on a regular basis.

And discipline is hard when voluntary

Now, take Kathir, an accountant, who invests Rs.25,000 per month in mutual funds via SIPs. Due to a recent market correction, his existing portfolio is down by 12% and so he is considering stopping his SIP. If he indeed stops his SIP, he has nothing to lose immediately, although he may hinder his own long term wealth building.

In comparison, if Suresh or Sara stop their periodic payments, they stand to lose their house & hospitalization benefit right away. However, this is not the case with Kathir, why? Because SIP is voluntary, no one is imposing this periodic payment on him. This makes it all the more challenging for him to stay invested in a disciplined way with his SIPs.

How discipline helps an investor?

At this juncture, it is important for Kathir to keep his focus on his long-term goals. If he wants to fulfill his financial goals in future, he must continue with his SIPs regardless of market movements. If he lets short-term market volatility dictate his investing approach, he may not have sufficient money to fulfill his future liabilities.

Time is money

To understand the power of time, let us consider an important life goal of Sara (age 25) & Kathir (age 35). They both have a goal to retire at 55 years of age and would like to get a retirement income of Rs.50,000 per month in today’s terms (present value). To attain their respective retirement goals, Sara needs to save Rs.16000 p.m while Kathir will have to save Rs.30000 p.m. This is because Sara being 10 years younger to Kathir, she has 30 years left to retire.m while Kathir has only 20 years to retire. Even though the time difference is only 10 years, the amount required of Kathir to save doubles, as he has lesser time to put his money to work.

Young people like Sara may not have Rs16000 disposable income at age 25, an alternate would be to start even with a smaller amount such as Rs.8000 and increase it by 10-15% every year to attain the same goal.

Similarly, if Kathir wants to fund his daughter’s higher education expense of say Rs.10 Lacs (in today’s cost), he needs to start investing when his daughter is 10 years old. In this case, he might have to save only Rs.15000 p.m. If he postpones saving for this goal until she is in class 9 or 10, then he might have to shell out Rs.35000 p.m or higher because he does not have the time to let his money work & multiply for him.

How Time helps an investor?

In essence, time is money. You do not need to hit a jackpot or become a millionaire to achieve your financial goals. The secret is, even with little money, you may be able to fulfill all your life goals, provided you have the knowledge, discipline and time on your side!