India’s fast pace economy is heading towards becoming 4th largest economy by 2022. Higher GDP rate suggest that we will be getting good returns on our investments made in stock markets but cautiously. The thing which will derail us from getting the real benefit of economic growth is, we don’t focus on things which we control, rather we waste our energy & time on things we don’t control. That goes with Investments, as well as our Professional & Personal life.
We Focus On – What We Don’t Control
Returns
Most of the investors only talk about returns they got from any investment. They just forget that they are only discussing past performance & there is no guarantee that it will repeat or not. Investors should focus on setting their Financial Goals & devising a strategy to achieve them. Investing on the basis of past performance can be a disastrous strategy & may lead you to serious troubles.
We Rarely Focus On – What We Can Control
Risk
Investors have started investing in stock market through mutual funds & hopefully they are doing it right, thanks to the Mutual Fund Sahi Hai campaign.
Though investors still don’t understand about equity investing but now they need to understand that higher return never comes alone there is always a risk associated with it, whether active or dormant.
But if you will start avoiding risk in this high inflationary scenario then this will become the biggest blunder of you investment life. So what’s important here is Risk Management
Time
Stock market gives returns to those who are patient over those who are not. It’s like business: you invest years in your business before reaping actual benefits out of it. Power of Compounding needs time to show its impact on a investment.
“It doesn’t look like much in the beginning. The power comes in the last 10 years from compounding the money saved in the Previous 20″…Duane Meek
The graph truly portrays what Duane Meek said; see how power of compounding starts showing its impact from 20th year. You can also achieve it
Graph 1: Growth of Rs. 1000 investment in 40 Years at different rates
Graph 2: Growth of Warren Buffett’s wealth with time ( see the trend in both the graphs)
I hope this clarifies why only few people reap the real benefits of equity investing; just because they are Patient.
Cost
You should have an eye on the cost we are paying on a product viz-a-viz the value & return we are getting. If we get additional value or returns in a product by paying extra cost only then we should consider the higher cost.
There are some products like ULIP (Unit Linked Insurance Plan), which also invest in stock market and often misrepresented as mutual funds by some agents. ULIPs are different because they charge you more than a mutual fund scheme.
However, they justify their high charges by saying that they are also providing life insurance, which is not available in mutual fund schemes. But, if we take a combination of Term plan for insurance & invest the remaining amount of the premium we are ready to pay for a ULIP, we will be better off than a ULIP
For ex: If you are 30 years of age & contribute Rs. 250000/- annually in a ULIP or in a combo of Term Plan & Mutual Fund for suppose 25 years.
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For calculating return: on insurance policies 9% rate has been considered & for mutual fund 12% has been considered.
The difference between the returns of both the investment strategies is 1.43 crores, that is humongous. Be aware.
Behaviour 
The most important thing over and above any other parameter which is required to become a successful investor is our Behaviour. Without right behaviour needed for investing you will do so many mistakes, only to regret later. But remember “Lost time is never found again”
The graph demonstrates that there is always a difference between the returns given by an Investment product & returns generated by an investor by investing in that product. That happens due to investor behavior if our behavior is good than we may decrease this gap in returns. This gap is referred as Behavior Gap.
The Investor Behavior depends on many different factors like:
B : Better Advisory Recommendation Available
E : Emotional Control
H : Humility to Accept Change
A : Averse to Herd Mentality
V : Very Disciplined
I : Informed
O : Open-minded to Learn New Things
U : Unlearn Old Thoughts & Tricks
R : Realistic
“It is better to hang out with people better than you. Pick out associates whose behaviour is better than yours and you will drift in that direction.” — Warren Buffett
Things that seems easy are tough to follow, because we perceive them to be unimportant. If we start focussing on these those things then they could leave a lasting positive impact on our personal & professional life.
I hope this would help you to review your focus towards investments & align your behavior in such a way that it become a stepping stone in your path to create long term wealth.
If you have anything to add to the article or any query, do write down a comment. We would be very happy to discuss that.
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