Over the years the ‘protection’ has moved from physical to financial. These days it is more important to provide financial protection which has a lasting effect.
After providing for risk, that is taking a comprehensive medical insurance policy and life insurance, it is important to focus on building her capital so that she achieves financial independence.
One way to do that is to ask her to invest in a Systematic Investment Plan (SIP) in an equity-linked plan and allow her to reap the benefit of compounding.
Provide market education
The other way is to educate her in the process of investing and let her build her intellectual capital which will lead her to build her financial capital.
There is no need to take an MBA or a CFA degree to be educated enough to learn about investing. As the legendary portfolio manager Peter Lynch said “All the math you need in the market, you get it in fourth grade”.
Investing is a lot about common sense, identifying opportunities, and then sticking to them and allowing time and compounding to play its magic.
Start by educating your sister through books, mainly biographies which are easier to digest, and then scale it up to tougher topics. Select investing strategies that match her line of education.
These days there are readymade filters available that will give an output based on the query. For example, if we want the fastest growing companies or companies that offer the best dividend yield and so on.
Thus, even if one does not know how to calculate the formulas but knows to interpret the numbers, it is good enough.
When it comes to investing, timing the market on when you are entering is not important, but exiting early is a sin.
Investing is all about entering a good stock at a reasonable valuation, if not depressed, waiting it out, and allowing the story to unfold.
As far as the company that she is investing in is properly managed and there is a proper process of investing in the stock there is little to worry about.
Investing infrastructure
While her education is on ask her to open a broker’s account and link it to her bank account. This will help her to be ready with her systems in place in order to invest.
Remember to keep transaction costs as low as possible, not that it matters when one is investing since transactions will be few and far between, but the habit of saving gets inculcated.
Having a broking account and a bank account is one thing, but the bank account needs to be adequately funded so that when an opportunity arises one should not be short of cash.
Money should first be saved and whatever is remaining need to be spent. Having a frugal lifestyle helps in meeting investing and life goals.
Conclusion
There is no better gift than the gift of knowledge. Teaching your sister how to invest and benefit from compounding to achieve financial freedom is one of the best and long-lasting gifts that a brother can give to her sister.