Can I compensate my low income with higher investment return?

Image of a man looking up at tall trees representative of the title question "Can I compensate my low income with higher investment return?"

Published: May 7, 2020 at 11:27 am

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Sooner or later after we finish college and start working, a life-altering realisation hits us. We find out what our school mates and college mates are doing, their lifestyle, how much they are likely to earn etc. We begin defining our relative station in life. What should a reasonably young person with “low income” do to achieve their financial goals? Invest differently? Take on more risk to have a shot at higher return?

Investor opinions are often extreme. In the last few days, I received two such comments. One said, “your investment plan is not suitable for middle-class. Say something for our level” in response to a video on how to start planning for retirement in Tamil.

Another said, ” IMHO, despite poor return if you have achieved good handsome corpus only means you have a big fat income… That may not be the case for all. So I think return definitely 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 very opposite but the core reason is the same: low income.

The underlying problem is the same too – the belief that different income groups should invest differently. Where and how we invest depends on our understanding of the process and not how much we can invest. Whether we can invest only Rs. 500  a month or Rs. 5,00,000, the basic rules of asset allocation and portfolio management are the same.

Staying away from visible investment risk (aka volatility) under the assumption “my income is too low” would only make things worse and seal our fate. On the other hand, assuming that “I should take on more risk to compensate for my low income” is just as dangerous, perhaps even more.

New mutual fund investors who fell for the charm of huge returns from mid cap funds, small cap funds and even Nifty Next 50 before Jan 2018 had to pay the price after that. This is fairly innocuous risk-taking compared to day trading, F&O, p2p lending, crypto, leveraging etc.

I keep saying “returns do not matter” (ref: 2nd comment) because when investing in the capital markets we have little control over the returns. 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: 15-year Nifty SIP returns crash to 8% (51% reduction since 2014).

When even active risk managers (tactical asset allocators, market timers, day traders etc) often get it wrong and appreciate the possibility of a huge spread in returns, the typical young investors with low income and even lower time to manage money simply cannot assume staying investing in riskier investments would help them “compensate”.

I wish I could say,  higher risk = higher return, but the sad reality of life (aside from low incomes) is, higher risk = higher risk and nothing more. So for a young earner to take on more risk because their income is low after comparing it with someone older with different skillsets or educational qualifications is asking for big trouble.

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So what can be done? First of all, we must accept the inequality of life. It is essential for society to function. Not everyone will (or should) get the same kind of income. Not everyone will achieve their dreams or goals. However, try we must, in the right way.

Instead of wasting time comparing ourselves with others, we need to focus on moving up the ladder one step at a time. To do that, risk-taking is essential. This the only luxury for those with a meagre income if they are young.  The right kind of risks: with your time, with your effort.

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

Which 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 with little to invest, then 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, cost money but could payback 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 who 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 freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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  1. This post almost describes an entire philosophy on how to live one’s life, while appearing to talk about investing.

    I have been a fan of your posts for a long time, sir. Thank you for all the hard work you put in to maintain this website.

  2. The way you appear in your videos is enough to know about your philosophy of both finance and life Professor.

    We are lucky to have you as a teacher, keep educating us.

  3. This post is one of your better efforts.

    Given that, maybe the solutions suggested, could cover more bases. Say, for middle aged ones, entrepreneurs (including mom& pop shop types), office boys/girls at starting salaries etc. Solution lies both on income & expense side. ‘Commitment’ to oneself to improve lifestyle, ‘even if takes a lifetime’ – is I think, a necessary condition.

    Sharing the same concern as your article’s, we increased our office boy’s salary on the condition that he invests the ‘increase’ & any ‘extra income’ in an equity scheme SIP (appreciating your argument of it, not being a sure shot winner plan). He is yet to take up on our offer, though, to up-skill himself into becoming a sub-broker of financial & insurance products!

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