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Can Invest & Forget Strategies Give Inflation Beating Returns?

Let’s talk about the lazy man’s approach to investment. Some people call it “invest and forget”. However, as you will see from the following statements, it isn’t smart to just “forget”.

Inflation, or the year-on-year increase of prices, is probably the main reason why someone would even think about investing.

Consider this; if 8% is the average inflation every year, and you can buy something for Rs 100 today, 10 years from now, to buy the same thing, you will need Rs 215.89. In other words, Rs 100 today is worth only Rs 46.32 in today’s value terms after 10 years.

Unless your investment earns you a decent return above and beyond expected inflation rate, your money can actually become worthless.

The question then becomes: how do you beat inflation?

Let’s talk about the lazy man’s approach to investment. Some people call it “invest and forget”. However, as you will see from the following statements, it isn’t smart to just “forget”.

What is “invest and forget”?

Invest and forget is an investment strategy wherein you invest in certain instruments such as company shares, mutual funds, or even real estate, and simply forget about them. Make regular payments and don’t track what’s happening to your investments.

The reasoning is that over a period of time, your investments will always grow in value.

What really happens here?

If you invest and forget that you have invested, it’s like rolling a dice. Your investments will perform randomly based on multiple factors, including pure dumb luck.

Invest, but own your investments. If you invest in a business, wouldn’t you want to check its performance periodically? Similarly your investments require periodic health checks. The frequency on the other hand should be on the lower side.

Benjamin Graham, one of the greatest investors, said that if you track the markets too frequently then it is like listening to the ravings of a deranged person. The markets moves between extremes, which if frequently followed will do you more harm than good.

A periodic check, perhaps once a year, is ideal for tracking your portfolio of investments. Invest, but track every year.

Can they beat inflation?

Equity, in the long run, is proven to offer better returns than any other investment. However, equity is also fraught with risk. You can minimize this risk by leaving the management to professionals and invest in consistently performing equity mutual funds.

As for beating inflation, “invest and watch occasionally” is the best way to avoid the hassle and yet, keep your wealth accumulating.

The right way to do “invest and almost forget” investing

If you really want to minimize your effort but want market beating returns, you need to invest in equity mutual funds. Here are some basic rules to follow to invest well:

#1: Diversify your investments but don’t overdo it

Mutual funds by their very nature, diversify your portfolio. Holding tens of mutual funds does not lead to better diversification. Have a manageable number of mutual funds in your portfolio.

#2: Have a flexible but overall consistent investment approach

Moving your investments across sectors in the markets or across too many companies too frequently will dilute your returns. Pick a strategy and stick with it.

If you are not very well versed with industries and companies when it comes to equities, go with diversified equity mutual funds. A fund manager, whose full time job is investing, is best placed to take calls on sector and asset allocation.

#3: Pick the right funds

Go with a mutual fund with a good track record to minimize risk and maximize gain.

However remember this; past performance is not a guarantee of future returns. So check your portfolio performance annually and re-think your investments if needed.

Stay married to equities; not particular funds.

#4: Follow a disciplined investing approach

Compounding is your friend.

Invest regularly; invest whenever you have money. Over time, your money will compound and start working for you.

#5: Give your investments time

Getting rich quick is normally a pipe dream. Historically, consistent investments in equity markets take at least five or more years to give inflation beating returns with the lowest possibility of making losses.

If you have made the right investments, give it time. Patience, not haste, will make you rich.

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