A pyramid for investors

[Value Research Editor's Note]( 29th June, 2024 --------------------------------------------------------------- Dear {NAME}, Every Saturday, I share my perspectives on a topic investors will find useful. Nowadays, investors are drowning in ever-more complex investment ideas. In all the hype about complex investments, there’s always a danger of forgetting the basics of why we invest. Every once in a while, in this weekly email, I’ll ignore everything that is newsy and talk only about the things that will NEVER change. A pyramid of investing needs I think everyone who is reading this newsletter understands the basics: - Why we must save - Why we must invest However, there’s another layer of concepts that is even more fundamental. At Value Research, we have created a useful framework for thinking about these investment needs. We divide investment needs into four levels. Each level is more fundamental than the ones that come after it. You should satisfy the need at each level before going on to the next one. Those who know a bit about psychology may recognise this system as being based on the ‘Hierarchy of Needs’, a concept proposed by psychologist Abraham Maslow. You can read details on the Wikipedia page by accessing this URL: So here’s Value Research’s Hierarchy of Investing Needs: Level 1: Basic emergency money: This should be the money that you may need to handle a personal emergency. It should be available instantly, partly as physical cash and partly as funds that can be immediately withdrawn from a bank. Typically, this should be 1-3 months of your basic living expenses. You should annually assess and adjust the amount, especially after major life events or changes in your monthly expenses. Level 2: Health insurance: This is a form of emergency money. The actual cover needed depends on the size of your family and whether you have to also take care of any elderly people in your family. Level 3: Term insurance: A realistic amount that should be calculated to allow your dependents to finance at least short and medium-term life goals if you were to drop dead or be struck with a debilitating injury or disease. This should be a big amount that would replace your income for a significant period. A general rule of thumb is 10 times your annual income. This can be adjusted depending on whether there are other earning members in the family and whether you have your own house. Level 4: Savings for foreseeable short-term goals: Money that is needed for expenses that you plan to make within the next two to three years. Almost all of this should be in minimal risk deposit-type savings avenues. The focus is on capital preservation. Level 5: Savings for foreseeable long-term goals: Same as level 4, except the planned expenses are more than three to five years away. These should primarily be equity or equity-related instruments, like equity mutual funds, as they generally offer higher returns over the long term. One could think of many other levels beyond this, and really, the details matter much less than the concept. Depending on one’s circumstances, any of the levels may have to be modified. However, do keep in mind that this is not a way of deciding how much to invest in each need. The point of this system is to prevent you from going to a higher level unless the lower one is fulfilled. If you haven’t put emergency cash in a savings account, don’t buy term insurance. If you don’t have term insurance yet, then don’t start putting away money for your daughter’s college education and so on. Of course, as I said, my readers are knowledgeable and understand far more than the average person. However, do share these ideas with friends and family who may not, especially young people who have just started earning. Thank you for being a Value Research Insider. I hope you found this note useful and interesting. What did you think of today’s note? [Let me know](mailto:dhirendra@valueresearch.in). If you know anyone who would enjoy it, please forward this email. They can sign up for free [here](. You can also subscribe to the Hindi version [here](. [vro-logo]( Copyright © Value Research India Private Limited 2024. All rights reserved. C-103, Sector 65 Noida, 201301. [Manage Newsletters]( [Unsubscribe]( [Privacy Policy]( Follow us [twitter-icon]( [facebook-icon]( [youtube-icon]( [linkedIn-icon]( [instagram-icon](