Your reluctance to investing substantially in equity is costing you one heck of a lot

In the realm of personal finance, one of the most common mistakes people make is their reluctance to invest in equity, adequately. Despite the potential for substantial gains, many individuals shy away from the stock market due to fear, lack of knowledge, or a conservative mindset. Many make big investments in real estate – buying a house and are saddled by a hefty EMI leaving them with very little money to invest in equity.  Whatever the reason for a low allocation to equity, your inability to get over it and make the investment in equity is costing you one heck of a lot; much more than you realize.

The Opportunity of a lifetime for Indian investors lies ahead

‘Mother of all bull markets still ahead of us: Rakesh Jhunjhunwala’ is the headline of an interview that appeared in Oct 2012. While writing this blog I am immediately reminded of the Big Bull and his eternal faith in India’s growth and its reflection in the stock market. I think every time he was interviewed, he enthusiastically reiterated this conviction in this but I think played it lightly by accepting that it could be called optimism.

Read the interview at Mother of all bull markets still ahead of us: Rakesh Jhunjhunwala

When I look back at the 40 years that I have been working in India, I’d say it was hope and optimism 80% of the time. But no longer. I’d say a good economic future is upon us. A long-term investor needs to think about what would it be like decades into the future, but I think if you can stretch yourself and think 10 years ahead and see India having stayed the current course for most of the time, you will know you are sitting on a goldmine.

The biggest beneficiaries of India’s march to a 10 trillion-dollar economy and beyond will be the strong and emerging listed companies. And you will be too, provided you invest in them and stay on the course. And that should not be very difficult to do…at least in theory

Don’t underestimate the Power of Compounding

One of the fundamental principles of investing is the power of compounding. Compounding allows your money to grow exponentially over time. The earlier you start investing, the more time your money has, to compound and grow. By delaying your investment decisions, you are essentially robbing yourself of the opportunity for your money to work harder for you.

The reason most people don’t get the power of compounding is that for many years in the beginning the growth looks too small to be impressive. And rarely do we think in terms of decades. But we will live for a few more decades (at least most of us), some for 5 more decades. Now to appreciate what this means, know that 1 cr invested today and growing at 12% CAGR will become 30 cr in 3 decades. And frankly, you will be required to do very little to make this happen as I will explain later except get committed to a robust investing process.

Don’t underestimate the need to grow your investments faster than Inflation

Inflation erodes the purchasing power of money over time. By not investing and allowing your money to grow, you are essentially losing money in real terms due to inflation. Inaction in investing means the value of your money decreases over time, making it harder to achieve your financial goals. Essentially your 1cr will become only 6 cr if compounding at 6% for 30 years, but the buying power will be the same as 1cr today because inflation has eroded the value of money. You are unlikely to meet your financial goals by putting all or most of your savings into FDs and Debt funds.

Overcoming the Fear of Risk

Fear and uncertainty are common reasons for inadequate action in investing. Many individuals are afraid of losing money and, as a result, choose not to invest in equity or invest less than they should. However, it’s crucial to understand that all investments that can earn returns higher than inflation come with some level of risk. So, you need to manage and mitigate these risks.

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