People don't become wealthy by accident. You have to be determined to do the right things to create wealth. Since it starts with mindsets, we suggest that you nix these three common, yet costly, habits.
“I can’t afford to invest right now. I’ll do it next year once the company reinstates bonuses.” Sounds familiar?
Procrastination is a bad trait in itself, but can be disastrous when it comes to investing. Procrastinate on your diet if you need to (not that we are suggesting it). But don’t delay on your savings plan. The longer you wait, the more it works against you. Compounding is a mathematical computation that works with time on its side.
Don’t wait for your next bonus to invest. Also, as your salary or income increases, let the allocation to investments also rise. The more you delay, the more it reduces the amount of time your money has to work for you. If you had invested Rs 2,000 per year over a decade, the value of your investments at the end of the time period would be far greater than had you started investing Rs 4,000 per year halfway through that period.
Let’s say that you start saving at the age of 25 with the purpose of accumulating Rs 1 crore by 65. For ease of understanding, let’s assume the rate of return as 9%. To amass this corpus, one would need to invest Rs 2,140 on a monthly basis for the next 40 years.
Delay this exercise by just 5 years. If one starts investing at the age of 30, acquiring the same corpus would require an investment of Rs 5,460 every month. Alright, that too sounds doable. Now let’s push it back further.
If one starts investing by 50, s/he would have to shell out Rs 51,700 every month for the next 10 years to reach the target of Rs 1 crore.
2) Taking useless advice
Cynicism isn't a particularly positive attribute, but it has its place. Be cynical of tips when it comes to investing. In fact, it makes sense to avoid them altogether. Tips are for waiters, not investors.
When investing in an equity product – be it stocks or a mutual fund, you need to make an informed decision.
Besides tips, avoid hunches and speculation. Don’t risk gambling away your savings.
To be a successful stock market investor, you need to think and behave like an owner. If you are buying businesses, it makes sense to act like a business owner. This means reading and analysing financial statements on a regular basis, weighing the competitive strengths of businesses, as well as having conviction and not acting impulsively.
It also means you have to pay wisely for quality. The difference between a great company and a great investment is the price you pay. You decide to enter the stock market at a time of frothy valuations, you will have a very, very long wait to get a decent return on your investments.
Similarly, don’t invest in a fund just because a friend or colleague or family member pointed out what a great run it had. Make the effort to understand the fund’s investing mandate and how it would fit in with your overall portfolio.
3) Avoiding equity
Investors can fall short of their financial goals for many reasons--key among them is under saving. But even if you are saving sufficiently but not giving the savings a chance to grow, you could be high on shortfall risk.
If you are avoiding equity on the premise that it is more volatile and hence more risky, you are not seeing the whole board, to borrow an analogy from chess.
Where your long-term goals are concerned, don’t shy away from maintaining an equity exposure in your portfolio. If you choose to do so, you could be jeopardising your entire financial plan.
No one is suggesting you go out and randomly invest in equity. If you do not have the expertise to buy into stocks, consider equity funds that are consistent and invest in them systematically. For instance, the 10-year annualised return of the flexi-cap category of equity mutual funds is around 11%. Do note, this is just the category average. There would be funds that have delivered much more. Or take the case of the mid- and small-cap category over the same time period - 13.18%.
Not only is this much higher than what you would get in a fixed return instrument, it also has no tax implications in the sense of long-term capital gains being nil in equity mutual funds.
Neither are we suggesting that your entire portfolio be tilted towards equity—there are various considerations that will go into such a decision, namely your age, the number of years you have left before you throw in the towel, various sources of income, and your risk capacity. But a too-conservative portfolio--one that emphasizes cash and fixed deposits and bonds at the expense of stocks--can actually enhance shortfall risk. Have a sensible asset allocation fine-tuned to your circumstances.