Through smart investing, one can outpace inflation and increase the value of money. Long-term investment allows investors to take advantage of compounding, which involves reinvesting profits again and again. Over time, this compounding benefit helps generate even higher profits. With long-term investment, investors have the opportunity to roll over the profits earned from one asset into other promising investment instruments.
Time spent in market more important than ‘timing the market’
Experts suggest that one should focus more on ‘time in the market’ rather than ‘timing the market.’ One should never try to predict market fluctuations; instead, an investor must look at long-term investment strategies. This involves building a good portfolio of different assets and holding onto them for the long haul, without getting worried about short-term market movements.
Shaily Gang, Head of Products at Tata Asset Management, explains how specific objectives provide a roadmap for investment decisions and ensures alignment with long-term financial aspirations.
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People understand that certainties are rare but they do not understand probabilities, she said, adding that the world is governed by chances and not certainties, but in the real world, people pay attention to black and white.
“One cannot make an exhaustive list of all the possible risks, let alone provide for the same. This is where having a good amount of threshold wealth helps. Money helps one to manage other things well. The indiscriminate manner in which COVID-19 hit the world was unthinkable. Risks like those cannot be provided for. This is one big reason why one should invest regularly,” Gang emphasized.
Stating that true wealth isn’t solely determined by one’s income level or inheritance, she said wealth is not a function of how much you earn or what you inherit. “Wealth is what you do with what you have. Extremely successful people who got rich went bankrupt because they either spent lavishly or borrowed.”
Gang highlighted instances where individuals with modest earnings managed to build significant wealth through wise financial decisions and management.
Real instances where investors amassed huge wealth
There are real instances where the librarian or bookkeeper earned a small sum of money annually but left a large sum as an estate. “Warren Buffet started investing at the age of 10 and continued to invest, building a very large net worth compared to his acquaintance Simon, who started investing much later at age 60,” she cited an example.
Talking about the need for diversifying investment portfolios across various asset classes to mitigate risks and optimise returns, Gang said asset class winners and sector winners amongst equity asset classes keep changing with no set pattern. Thus, it is extremely important to diversify one’s portfolio.
Benefits of consistent investing
She discussed the benefits of consistent investing in leveraging the power of compounding, reinforcing the notion that steady investments result in substantial wealth accumulation over time.
“It is not about timing the market; it is about time in the market. Total corpus as a multiple of the capital invested becomes higher as you spend more time in the market on account of compounding. In waiting for market bottom to be formed, the investor would lose out on spending ‘time in the market’. The investor could lose more by waiting in cash while all SIP tranches could have earned in a market that turns out to be upwards linear,” Gang noted.
An investor who starts SIPs earlier, at the prevalent market levels at that point in time, would be able to build higher absolute wealth than the investor who waits for the market bottom to be formed as he spends less time in the market. XIRR return could be lower in this case, but it is more about the creation of absolute wealth corpus, she added.