How Much Should a Beginner Put in the Stock Market?

Even a beginner in the stock market can make 100Crs if they are willing to be patient. All you need is patience, temperament, and the right asset allocation strategy.

Thanks to discount brokerages like RobinHood and Zerodha, Investing has been ‘Democratized’. The field now is more even than it has ever been. In this day and age, not using the Stock Market to generate wealth is inefficient utilization of resources. 

But just because you can trade doesn’t mean you should trade.

There are some things that a beginner must keep in mind before putting money in the stock market.

Unless you are conscious of these factors, you will be like a one-legged man in an ass-kicking contest – you will try very hard but will always end up on the floor. 

Instead of providing you with a bunch of formulas(most of which are ineffective), we can give you qualitative factors that must be kept in mind when you think about ‘asset allocation’ or particularly, how much you should put in the stock market.

Contents

What should a beginner consider before investing:

Age.

A significant factor because it in part reflects your responsibility. When you’re young, you can afford to take a lot of risks. In our opinion, a majority of your income should be invested in securities. The reason we say this is because equities are a mighty asset class. It offers outsized returns over time. For a Young beginner in the stock market – even index investing will provide a large corpus.

Return Requirements.

We disagree with the jargon of “Higher the risk, higher the reward”. But if you wish to be in equities and enjoy a 15% annual return, you have to digest the fluctuations in the market. The higher your return requirements, the higher is the volatility you need to take. (typically)

If your return requirement is around 10% – you can buy Gold as Gold has given a CAGR of 9% in the last 30 years. 

If your return requirement is lower – FD might do it for you. 

We should also warn the readers to have realistic expectations. A beginner in the stock market should have return expectations close to 13%.

Risk-Taking Ability. 

Another significant factor. This not only depends on your age but also on what sort of exposure you have had – if you have entered the stock market after 2011, you haven’t seen a “bear market” and you naturally are more willing to take risks.  Simply stated, your exposure to equity should increase in proportion to your risk-taking ability. 

Beginner Investing in the Market:

Young – Low responsibility – Teenager, College Student, New Job. 

You can(should) invest all the money you can. Live a frugal life, thrift if you have to but invest all of your money. Your portfolio should look something like this – 

How much should a young beginner put in the stock market.
Young individuals should invest as much as they can in the stock market.

Older – Saving for Retirement – have a family to feed

Investing in your case is different. You need to diversify your asset classes. You need equities to generate returns but need dividend income and other capital assets to support additional needs. 

How much should older people invest in the stock market.
For older individuals – Short-term bonds provide constant cash flow, gold bonds offer stability while the stock market(direct or mutual funds) provides additional returns.

The template provided above is just to explain what your exposure should look like. In investing, you cannot apply a “one size fits all” approach. 

Also, life is dynamic and so is investing. With a change in your circumstances, you can change your exposure to the asset classes. 

Fortunately or unfortunately, if you wish to get a higher return – you have to invest in equity. Equities are a strong asset class that guarantees high returns over a long period of time (over 15 years). If you can wait for periods longer than that – equities should be given a higher weightage. 

Putting all of what has been told into practice – a guide to 100Crs from stocks

Our protagonist is ‘A’. 

Assumption: 

She invests by the time she is 50 years of age. 

LTCG tax is not involved. 

All her investments are in an Index fund that returns about 15%,( Nifty’s performance over the last decades)  

Her life can be divided into 4 parts. 

  1. A college-going student that is doing her internship(3 years). 
  2. A young employee early in her career(5 years; 21-26)
  3. An experienced employee with familial responsibility(15 years; 26-31)
  4. A Boss that wants to retire by 50 but has greater familiar responsibility. (19 years; 31-50)
  • As an intern, she invests all of her stipends in an index fund i.e. for 3 years she invests 5,000/month to earn a 15% return.
  • When she is a young employee, she has expenses so she invests 80% of her income – about 35,000/month to earn a 15% return.
  • Now, she is an experienced employee with some degree of familial responsibility, she invests 55% of her income- about 96,000/month to earn a 15% return.
  • Finally, the protagonist is a boss with a lot of familiar responsibilities –  she invests only 30% of her income – about 90,000/month to earn a 15% return. 

By the end of this exercise i.e by the time she is 50 years old, she will have a corpus of ₹1,35,35,25,443 i.e. one hundred and thirty-five crores thirty-five lakhs twenty-five thousand and some change. 

It should be kept in mind that the final outcome might be a little different because the booms and busts in the stock market might disturb consistent compounding. Ultimately, her final corpus will be in the vicinity of a hundred crores. 

Can You do earn 100Crs from stocks?

She earned all of this by simply investing prudently all her life and practicing delayed gratification.

The example provided above was to give you an idea of how a beginner should invest – the factors we have provided are qualitative in nature. However, if you need guidelines, we have provided them below. 

100 – Age = Investment in equity. This is quite simple and really popular. So, for example, if you are 25 years of age. You should invest 75% of your income. The rest can be for your spending/ investment in other assets such as debt. 

Naturally, if you are older – let’s say 55 years of age; you would have equity exposure(in your corpus) of about 45% and the rest would be invested elsewhere. Since you are 55 – bonds would be a safer bet but again, if you have money flowing in from rent, you can speculate in crypto for higher returns.

Ultimately, the article above provides you with an outline of factors that must be considered by a beginner in the stock market. ‘Considered’ is the keyword – there is no “one size fits all”. You will have to apply your brains to it.

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