Investing v/s Saving…A never ending illusion

Investing is the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.

Saving is income not spent, or deferred consumption, or also money set aside to be used in future.

Both the terms are used frequently by us interchangeably but in reality they mean differently. We may also say that saving is the stage of money just before using it for investment or something else.

If we try and understand the meaning of these terms we will find two major differences.

Investing requires some kind of Act or Action
Investing has some Objective

We often ignore this demarcation between Investing & Saving and carry this never ending illusion till the date our retirement arrives. Investing requires a serious action plan well in advance if we want to reach our goals & objectives well in time. Else we have to postpone our retirement day & work tirelessly at the age when we need to relax.

Most of the people have a grievous retirement as they always invest without having a proper Financial Planning or Financial Advisory. Money earned after a lot of efforts & hardships is invested in unplanned way which will surely not produce desired result.

Investing is a process

Investing for most people begins and ends with just signing a cheque, while it’s not so.

Investing requires a serious and disciplined approach taken in consultation with our Financial Advisor. It requires a detailed discussion over our Risk profile, Cash flow analysis, Human Life Value, Insurance Planning, Asset Allocation, Goal setting, Emergency fund planning, Retirement Planning, etc. After all these processes are complete then we proceed to final Investment…But in reality we jump over to the last step hastily.

Humans with time got strangled in different kinds of myths; here my idea is to break few common Investment myths.

Investment Myths

1) Insurance is an Investment:

Ask randomly to anybody, where do you invest?, we will find a most common reply “Insurance”. If you will ask them again, how much are you insured? Then they will start scratching their head & finally will reply “Rs.25000 or 50000 per year or sometimes even more as an answer.” People remember their premiums, but they don’t know their sum insured…thanks to internet revolution that now percentage of these kinds of replies is declining.

We must understand that Insurance is an Expense and we should not treat it as an Investment. We should always focus on sum insured rather than the return we expect from the policy. The sum insured must be adequate enough to meet our family needs in case the earning member passes away… We will discuss it in detail in another post dedicated to insurance.

2) I am too young to Invest or Plan my future.

Younger people don’t think about investments as they are more inclined doing expenses and enhancing lifestyle. The reason behind such attitude is that they think they have plenty of years to do investments & forget about it. However, this becomes one of the biggest blunders in their lifetime which they regret later. But by that time ship has sailed enough to turn back.

For ex: A starts investing 5000 Rs. at the age of 30 yrs and B start at an age of 25 yrs. They get return of say 12% annually.

At the age of 60 years, both the investments will look like this:

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Difference of 1.46 Crore!! just by investing 3 lakh extra. Am I dreaming?

Its true. But what made the difference is the extra 5 years that were given to the investment by starting early. The investment got 5 years extra time for compounding.

And if A need to reach to 3.22 Crores, after starting at age 30 he would have do monthly investment of 9200 Rs. i.e investing 4200 Rs extra per month for 30 years. That sounds more painful than the table above.

So think about it…

Albert Einstein had once said “Compounding is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t … pays it.”

3) Safety of Investment should be the only objective…FD’s are the best option

Staying away from taking risk is too easy job to be done…or it’s just like doing nothing.
Just think of Sachin Tendulkar only trying to save his wicket while batting rather than focusing on playing good shots…would he have been a top player then?

Safety can be managed by taking calculated risks and by having proper planning beforehand. Risk is only facing some kind of unlikely event, so we must be prepared for that well in advance through Financial Planning.

It doesn’t mean that we should not invest in FD’s, but we must invest taking care of our goals & investment horizon. Not just put all money in FD and forget it. Post tax returns of FD’s will hardly beat inflation & will actually return money having a lesser purchasing power than the day it was invested.

Always remember good risk always pays extra returns over safety in the long run.

4) I am not that intelligent to take right investment decisions

Investment decision making is not a rocket science. Even an ordinary person can take right investment decisions just by having control over emotions, being realistic, open minded & disciplined. We may also get professional & expert advice from Financial Planners.

5) Stock markets can earn me quick bucks

This is a common myth among investors. Stock market reward the long term investors and we should not fall in the trap of getting rich overnight investing in it. Stock market is a system which transfers money from investors who are fearful and greedy to the investors who are balanced and rational.

You need to be calm, patient, disciplined, and rational. You don’t have to be smarter than the rest; you have to be more disciplined than the rest.

6) Timing the market is important

Talk to anybody investing in stock market they are always concerned about the right time to invest and right time to exit the stock market.

In other words, they want to time their exit when the market has reached its top and to time their entry when the market has reached a bottom. That not a practical idea because there are so many influencing factors to the stock market. Predicting all the factors and making investments is practically not possible.

Instead of that stagger your investments through SIP, STP and stay invested for long term…Do you hear news of promoters selling all of their shares/stake when the stock market crash or rise?… Promoter of a company is its oldest investor & that’s why one of the richest investor too.

7) I should diversify my portfolio as much as I can

We should avoid falling in the trap of over diversifying our investment portfolio. However we feel a sense of reduction in risk after doing so, but it actually takes our portfolio towards chances of reducing returns below average.

Optimum diversification can be achieved through 5-7 good mutual fund schemes in accordance with our investment objective.

8) Follow the herd…

This is one of the most fatal thing we can do with our investments…get out of this mentality immediately. Boss we are not sheep or goat & if we will think like that, then surely get ready to be slaughtered.

This ideology has so many flaws:

1. 1. Your investment objective, risk appetite etc are unique to yourself only.
  2. If you will do the same thing what everybody is doing then you will also get the same result…however we know that everybody can’t get rich. Then how will we?
  3. You need to be fearful when others are greedy and you need to be greedy when others are fearful…we read this quote frequently but we forget it too frequently.

Remember what we say to our kids “Don’t follow what others are doing just focus on your work & study”
We say this to kids because we know all the kids in the school will not excel to great heights in studies, so we don’t want our kids to follow herd…Are we even worse than our kids or we having double standards?… Think over it.

9) Tax saving is the only objective to invest

Gone are the days of doing so, in this high inflationary scenario we can’t afford to do it. You will hardly be able to achieve your life stage goals or have a good retirement life, if you will think like that even for another second.
We must invest according to our life stage goals & retirement planning… People have already started doing so.

I have tried to give a brief outline of most common investment myths which people have in their mind. We will also discuss all these myths in detail in my other posts with time.

Time never waits for anybody; we will never get the day which has already passed to fix our mistakes of the past. But still future shows us hope & path to begin all over again.