The best way to draw appreciation from the long-term investment is to put funds in safe hands, wait patiently for a few years & withdraw when you are under dire stress. That is the strategy used by many to get maximum appreciation from investment. This is the first notion I will deal with, although prefer calling such practice as savings rather than investment. The worth of wealth is understood the best in the face of trouble when one has no option but to fend for oneself. That’s the time one starts evaluating how much is accumulated, is that enough? I found this topic most relevant for now, as my investments are big solace during my career transition like many others who dared to venture of their own or lost jobs under the adverse spell of the pandemic. Consistently adding and compounding wealth is crucial much before you prepare to venture the risk, be it job change, migration to another country, business initiative or any other life-changing decision.
How many of you have the conception that saving is equal to investing? It is a fact that interest rates in safe fixed investments have reduced substantially over time where most of the savings happen. Three economic evils erode your money, inflation, reduction in interest rate & change in the tax structure. We have the experience, how time devalued rupees, one needs to hunt to buy an item in ten bucks today, someday hundred bucks will follow the suit. Assessing the future level of inflation is extremely difficult. The challenge, therefore, is to achieve investment returns that keep one ahead of inflation. Billionaire investor Warren Buffett put it “Arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to deplete consume capital.” Just saving may not be enough to keep pace with inflation.
My research reflects that interest rates with bank and government deposits are presently fetching 5.5% and with time, banks may charge fees to keep your money with them. Even now post-tax return stands at 3% from these savings, the graph below is enough to illustrate how interest rates moved over time.
Introduction of Capital Gains Tax on investments mostly in Mutual funds and Stocks was another blow on your profit, this was not envisaged earlier. The worth of one lac will become thirty thousand in 25 years from now. Traditional savings can never sustain a long haul of unemployment or retirement. Then what should be the option?
This is one subject which is elementary but never taught in schools. Notions on investment make imprints in our mind from our growing years what we observed from our parents, it gets significance as we grow up. We follow the footsteps of other professionals, friends, and colleagues who we trust smarter than us to devise investment strategies. But our ability to look beyond for better options is petrified with scary thoughts of losing money in high-yielding lucrative investments. I have no intent to offer investment advice one may gather enough information from numerous contents available on the net or seek advice from fund managers. My purpose is to alight you on the fact how important it is to latch open your mind from limiting believes and embrace investment practices that get you compounded returns that support your purpose. The common notions that form the limiting belief with the investment are following:
1. Investment except guaranteed interest is risky – We are made to believe that one should invest with guaranteed interest plans to safeguard our capital, which gives us the maximum comfort. Our mind accepts low risk, low gain, or no gain option in such investments as long as capital invested remains intact. The inherent quality of Investment is a risk, calculated risk if one aspires to get a double-digit post-tax return on your capital. One needs to understand the nuances of variable high-yielding investment options and learn to have the patience to maximize gain, full dependency on fund managers not advisable.
Any guaranteed return plan will always be low-yielding. I have explained in earlier section the effect of evils of economy, your fund will erode with time. For example, investing in companies listed or unlisted with proper research & understanding is safe and can fetch a higher return. Your concern & periodic review of your investment are enough to derive decent output from your capital whatever be the size. We may start exploring the world of investment, with time your risk appetite will get tuned suitably.
2. Do not save enough to invest – It is said one should invest first then keep aside money to run your family. I am certain with a saving mindset we hardly have balance money after meeting expenses. It is simple, how much we save, depends on the residue after spend. This mindset defeats the concept of investing.
In my difficult times, I have curtailed my running expense, avoided much good to have expenses but continued to keep aside a fixed amount every month for investment. Unless one nurtures a millionaire mindset, meeting aspirational financial goals becomes impossible. If you compromise on investment you will never be able to accumulate the capital, you require to fund your retirement, crisis, or luxury goals. One should have investment goals alike other life goals we set & chase.
3. Investment in stock and companies may turn you a pauper – Any achievement entails risk. We are taught to always avoid risk in life. Our conscious mind can not measure the quantum of risk but the slightest air of risk will trigger the sense of fear and we switch paths. This applies not only to investment but in all other spheres of life. Another proverb taught us, no risk, no gain. Although this contradicts our earlier notion, the question is in quest of building wealth how much risk one should take.
I have an interest in the stock market, Warren Buffet, the guru of investors once said, the risk appetite depends on the mental ability of the investor. How much one can absorb. The calculated risk with controlled emotion will bring the balance in your appetite for investment. There is no qualm about the fact that investing is the only way to build wealth to counter all other economic factors that cause erosion of money. My experience is encouraging, I could yield compounded returns from my investment.
4. Safe superannuation insurance plans are the best option to invest for retirement - How much money will be enough to run ourselves after retirement. My fund manager did an exercise which I presume is a routine practice to assess corpus required at the time of retirement to maintain a decent lifestyle. Ten years back I was anticipative, a cloud of procrastination dumbed my mind, the quantum he mentioned was a fantasy to me. I barely had any idea how to go about investing. Fortunately, I understood well by then that if my investments do not generate double-digit returns consistently, I will end up with peanuts after I retire. My aspiration to have a home at the hill and spend a life of leisure taught me that aggressive investment will bring me financial freedom one day. Insurance invests in debt instruments; it is extremely difficult for them to beat the evils of the economy in long run.
Financial freedom will remain a distant dream without wealth creation. There is no denial that safe investments can protect your capital but offer conservative growth, It will grow at a faster pace with aspirational investments which require calculated risk. If one could manage to pursue a successful career and keep investing in the right instruments wealth creation will be more certain.
5. Small investments cant’ make one rich – Lets’ accept the fact that the quantum of wealth one needs when retiring from active professional engagement depends on the lifestyle of the family. One may have decent monthly withdrawal post-retirement if the person is consistent with investment throughout life & started early. I have lost substantial funds during my earlier start-up journey but I made it up in the last seven years. A small installment invested in the right instrument and reviewed periodically can fetch a handsome return and compound. I will put it as a notion that small investment can’t grow big. I found many with investment rigor and determination learned how to get compounded return. Like we take our job and family seriously and protect them from eventualities, investments if treated similarly will prove to be golden. One needs to believe in creating wealth and must have the Millionaire mindset to meet any aspirational goal on wealth creation. Love to have your comments. Look forward for suggestions on topics that you want me to explore and write.