Patience, tenacity, long haul, belief in self, big picture ? all these words hold true in the world of investing. Such a torrent of words came in when a client shared a story of his colleague?s simple investing journey that created wealth for him.
In early 1995, Sanjay invested in a systematic investment plan (SIP) of R1,000 per month in a large-cap diversified equity fund. He continued to invest the same sum till December 2012, a period of 18 continuous years, i.e. 216 months of SIP, the investment corpus being R2.16 lakh. However, the total corpus which got created from this marginal investment of R1,000 per month was around R23 lakh: A CAGR return of 23%.
Now, that?s where patience (to continue and also stay invested for 18 years), tenacity (the ability to withstand the volatility of the Sensex over the past two decades), big picture (creating a goal and sticking to it) and belief in self (once the process is determined, ability to cut the noise of friends and well-wishers) come into the picture.
Common investment mistakes
Starting late: The moment you start to earn, in the first few months and years, you want to enjoy and show off the money you have earned. The avenues are numerous and the need to be in the same league with peers is so strong that saving for the future is the last thing on your mind. Look at the power of a R1,000-SIP. The power of compounding is your friend ? always and anytime.
Start with setting aside and investing a minimum of 10% of your net monthly income. If this also looks overwhelming, then start with a R1,000-SIP. Multiple drops of water go in to before it becomes an ocean.
Following the herd and peers: Each of your investment personality, needs and requirements are unique. What is suitable for your friend or brother need not be suitable for you. Remember 2007 and 2008, where you invested in equity mutual funds and/or stocks only because it was going in one direction ? up ? and your friend or family members were reeking in gains. You also joined in for easy and quick gains. And, then, the world crashed. You did not book profits or sell the losses at an early stage, waiting for recovery. And the recovery never happened. So, now the grapes are sour. Why? Because you followed the herd and did not have a strategy or an investment plan or goal.
Lack of product knowledge and information: You friend suggested that you invest in a unit-linked insurance plan (Ulip) and you went ahead. Your sister suggested mutual funds and you took the plunge. Your colleague made smart gains in real estate and you wanted to invest in real estate. Where is the link, connect and strategy? Invest your time first and foremost in understanding the financial product and how it suits your investment goal. It? s your money and only you know it best, better than anyone else.
Lack of patience: Rome was not built in a day. Same holds true for wealth creation. The 18-year R1,000 SIP journey delivered annualised returns in excess of 23% over the investing period. However, what is missing in the story is that there were major periods of non-performance when the equity markets were under water. However, the investor believed in the process and had a clear vision, the patience to stay put. And what was the result: Ten-times return. Trust yourself and your process. Do not get in and get out as the change of seasons happen. Do not chase returns, chase results.
Clamour for easy and quick return: How fast can I double my money? Can it give 20%-plus return? These are some questions for which you seek answers. Instead, do ask questions like is my capital safe? Will the company be able to deliver returns based on its financial performance? Risk and reward need to be considered before embarking on the investment journey.
On deeper insight, you will notice that the lack of financial literacy is the beginning point for investing mistakes. Financial knowledge is as important as your work knowledge or the area in which you have specialised. Spend at least 30 minutes in a month to understand the basics of investing. One of the solution for the younger generation is that every school curriculum should embark on giving an insight to students into how money works and the basics of investing. This will ensure that when they join the workforce, they are not financial illiterate.
One step at a time
* Start with setting aside and investing a minimum of 10% of your net monthly income. If this also looks overwhelming, then start with a R1,000 SIP
What is suitable for your friend or brother need not be suitable for you. Don?t follow the herd, have a strategy or an investment plan or goal in place
Invest your time, first and foremost, in understanding a financial product and how it suits your investment goal. It? s your money and only you know it best, better than anyone else
Do not get in and get out as the change of seasons happen. Stay invested and have patience
Don?t ask questions like: How fast can I double my money? Can it give 20%-plus return?
Ask questions like: Is my capital safe? Will the company be able to deliver returns based on its financial performance?
Risk and reward need to be considered before embarking
on the investment journey
The author is founder and managing partner of Zeus WealthWays LLP