Can higher investment returns compensate for my low income?

Published: January 10, 2024 at 6:00 am

A significant realisation strikes us as we complete our college education and enter the workforce. We discover what our school and college peers are up to, their lifestyles, probable income, and more. We start to determine our relative position in life. So, what should a relatively young individual with a “low income” do to reach their financial objectives? Should they alter their investment strategy? Should they take on more risk for the possibility of higher returns?

Investor opinions are often extreme. Here are two examples. One reader once said, “Your investment plan is not suitable for middle-class. Say something for our level,” in response to a video on planning for retirement in Tamil.

Another said, ” IMHO, despite poor return, if you have achieved good handsome corpus, you only have a high-fat income. That may not be the case for all. So I think return matters for general investors.” in response to My retirement equity MF portfolio return is 2.75% after 12 years!

The first comment was probably a reference to the need for investing significantly in equity, which the person assumes cannot be done by a “middle-class guy”. The second comment said the opposite, but the core reason is the same: low income.

The underlying issue here remains the same – the misconception that one’s investment strategy should differ based on their income bracket. The location and method of our investments should be defined by our understanding of the process, not the amount we can invest. Regardless of whether we can only invest Rs. 500 per month or Rs. 5,00,000, the fundamental principles of asset allocation and portfolio management do not change.

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Avoiding apparent investment risks (also known as volatility) based on the belief that “my income is too low” will only exacerbate the situation and dictate our financial destiny. Conversely, “I should take on more risk to make up for my low income” is equally misguided and potentially more harmful.

Novice mutual fund investors enticed by the significant returns promised by mid-cap funds, small-cap funds, and even Nifty Next 50 before January 2018 were forced to face the consequences afterwards. This level of risk-taking is relatively mild compared to day trading, futures and options, peer-to-peer lending, cryptocurrency, leveraging, and other such activities.

I keep saying, “Returns do not matter” (ref: 2nd comment) because we have little control over the returns when investing in the capital markets. What do you answer when someone asks, “Can I expect a 10% return from this fund over the next 10-15Y?”

The truthful answer: “You can expect whatever you want, but the market will give you what she pleases”. See: Do not expect returns from mutual fund SIPs! Do this instead!

Even experienced risk managers like tactical asset allocators, market timers, and day traders frequently make mistakes and understand that there can be a significant range in returns. This means that young, low-income investors with limited time to manage their finances cannot assume that investing in riskier assets will yield higher returns.

The harsh reality is that higher risk does not guarantee higher returns. It only ensures higher risk. Therefore, for a young person with a low income to assume more risk by comparing themselves to older, more experienced individuals can lead to severe complications.

So, what’s the solution? Firstly, we have to accept that life is unequal. This diversity is necessary for the functioning of society. Not everyone will earn the same income or accomplish their dreams. However, striving for better, but in the right way, is crucial.

Rather than wasting time comparing ourselves to others, we should concentrate on our individual growth. For this, taking calculated risks is crucial. This is the only option for young people with limited income. The focus should be on taking suitable risks and investing time and effort wisely.

Complaining that X or Y became financially independent because they had a significant income or went abroad is amusingly childish. Those guys could have messed up their lives by spending more, getting into debt, or investing incorrectly.

People who “accuse me” of having a high income are blissfully unaware that at age 32, my income was about 4% of my current income, and I was not even properly employed (and not yet in debt)! The point is, for most of those investing years, the available capital was small: My journey: driven by the fear of making the same mistakes again.

This brings me to SEBI RIA Swapnil Kendhe’s point discussed here: Three Key Factors that decide how we achieve our financial goals.

If a person spends several years after college focussed on building a career, she can start investing late and catch up comfortably as the salary would be pretty high (but would arrive late)

Swapnil said that after studying his clients. This is precisely what happened to me. During all those 11 years between finishing school and getting regular employment, I was supported by my parents in every possible way: O Captain! My Captain!

I was lucky, something I would never forget. However, it is one thing for me to call myself lucky and someone else to call me that! I hope I do not have to explain more.

If you are young and your income, expenses and debt leave you little to invest, you must chase risk. You must chase higher returns – not with your meagre capital but with your time and skills.

You have no choice but to push yourself to acquire new skills or take on additional work to increase your income (immediately or later). Skill and qualifications will take time and cost money but could pay back in the future. This should be the first option.

Additional sources of income could pay immediately, not much and may not scale or grow. See: How to Make More Money In India: Forty real examples and this freefincal youtube playlist.

This is the only guaranteed way to change your lifestyle. Those you detest because of their higher income will probably still be earning much more, but at least you have begun to do the impossible- change your station in life all by yourself, which is like trying to lift a load while standing on it!

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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