It is better safe than sorry i.e. better to sit in cash in the worst case, rather than worry about the opportunity cost of not remaining invested in such a dubious asset.
Do not be penny wise, pound foolish! How investors can ensure financial independence
Financial independence refers to a state where one has enough resources at disposal to meet expenses as well as fulfill future financial goals.
The first step to be taken on this journey is to stop procrastination. Different individuals will have different investment strategies as the goals (marriage, health, education, etc.) would vary, as would the time horizons and risk preferences.
One should research the fundamentals of an investment, cutting out unnecessary white noise, do own due diligence to make informed decisions, and never follow a herd approach.
One should also prepare for the base, best and worst-case scenarios along the investment horizon and adhere to it. This curbs emotional investing, irrational impulsive behavior, and any knee-jerk reactions.
One should not be swayed by exuberance, fear, or any aberrations. Volatility over the long run should not erode a substantial portion of the corpus.
Slashing expenses can be a good passive way to start paving the path to a well-thought-out portfolio – do not be penny-wise, pound-foolish.
This is in a way, equivalent to deciding whether an investment is over-valued and if yes, then decide to cut positions in it. As in the case of making an investment, cutting expenses also involves an understanding of the pros and cons at the nuts-and-bolts level.
One form of expense reduction could be debt trimming. One should nip existing debt in the bud, and try to avoid taking on more “bad debt” in the future. Examples of bad debt range from high-interest credit cards, to personal loans used for extravagant discretionary purchases.
One should always target reducing the most costly debt first as then interest expense would go down, thus freeing up more money. Not all debt is bad however and once again a sound cost-benefit analysis for taking on loans needs to be made.
For instance, taking on a home loan implies one could be a homeowner and the concerned property might appreciate in value significantly over the long run depending on the right market conditions and investment.
Starting early in this journey always has an advantage. One should make sufficient savings and investments in the early stages of one’s career.