What is the need of investing? The answer seems be very obvious: We invest our money in order to make more money. But the rationality behind our thinking is that we are saving this money to fulfil the needs that will arise in future. So we are investing keeping a goal in mind. The sad reality is that most people do not invest for goals. I am a big advocate of goal-based investing for all investors across age groups but very few investors stick to goal-based investing.
Need to make money
Their general idea of investing is related to the need to make more money and not to achieve specific targets. Typically, most retail investors invest keeping in mind their goals of funding children’s education, healthcare planning, funding their retirement, etc. Not everyone is same and not everybody has the same needs. Investing is about growing long-term wealth and not just meeting goals. Those investors who have addressed their essential financial goals early in their life and invest make enough long-term wealth. Since they can fund their expenses, they can afford to be patient and be long-term investors and let their investment grow. Now, those investors who cannot afford to wait for their return to grow should stick to goal-based investing. After all, there are certain requirements in future that need to be fulfilled: Upcoming children’s wedding or paying their college fees, etc. The disadvantage of investing for meeting goals is that you are not letting your investment become mature enough to generate maximum total long term returns. After all, the likes of Warren Buffett and Rakesh Jhunjhunwala did not invest to meet goals.
Invest in equity for long-term wealth
History has shown that investing in equity for long term has always given good returns. Over a period of 10 years, the equity market has the capability to deliver annualised returns of 12-15%. This clearly beats long-term inflation of 5-7% and any fixed return products. However, we do emphasise that to mitigate risk from equity, one should diversify, i.e., invest in different companies with different backgrounds. So, investors should first identify their goals, make goal-based structure which helps them in keeping track of where they are with respect to their goals. The remaining amount should be utilised in making an investment plan that allows them to maximise return on their investment. Most people are unable to give weightage to superiority of investing with a long term as they are in a short-term performance mentality. They want to see quick results and want to become rich overnight. But that doesn’t happen. It’s time to change the mindset and let our investment realise its full potential.
The writer is CMD, Tradebulls Securities