While investing, some people have antiquated ideas about wealth creation. It might have emanated from their own experiences or borrowed from the suggestions of friends and relatives. While some are popular, they are not true. Knowing the reality behind these fallacies can help you achieve your various financial goals.
Here are the four popular myths that are doing the rounds:
Myth 1: Save and become wealthy
Saving money is obviously better than spending your income. However, that doesn’t necessarily make you wealthy. Take the case of annual inflation, which has averaged around 7% in the last decade. If you had ‘idled’ your savings in a saving bank, it would have earned a paltry 3-4% annually; effectively eroding your wealth in the process.
Instead, if you had invested it in fixed deposits, you would have earned 7-8% annually. However, on a post-tax basis, your wealth would have still got eroded. Earning a return lesser than inflation is equivalent of wealth erosion.
In contrast, if you had invested your savings in equity funds, you could have earned about 12-14% annually and actually created wealth.
In order to generate wealth, you need to invest in an asset class that earns better rates than that of inflation. Otherwise, you might be saving, but not generating wealth.
So, it is not just saving, rather it is investing in the right financial instruments that make one wealthy.
Myth 2: My job and the provident fund will take care of my financial future
The life span of Indians is increasing. Those in their 30s now can expect to live till their 90s, thanks to better medical care and technologies. While it’s a welcome change, it also means that you need to work longer than the usual.
The big question is whether you will have the same energy and zest when you are 65 or more? Moreover, it might be difficult to get a job beyond 60 years. All this could affect your income after a point in time.
Furthermore, while your provident fund could have grown over the years – it is important that your overall savings hit a certain target kitty. You need to accumulate at least 25 times the annual household expenses at the time of retirement. If you are falling short, float a separate retirement fund and start investing till you get there.
Myth 3: Investing is all about timing
Sensex is nearing 50,000. Perhaps you might be thinking that the market is overheated and that you have missed the bus. Timing really doesn’t matter if you are there for the long haul. If you are in your 40s and planning to invest till you are 65, does it matter if you lose a 5% rally?
The role of SIP is often underestimated by retail investors. By investing in equity funds every month, you buy more units when markets are low and lesser units when it is up. Thus, you average out ownership costs over the long-term. And if the stock market moves up (historically it has) over the long-term, you tend to gain.
It is impossible to time the market and great investment stalwarts admit that they don’t know where the markets are headed over the next year.
Myth 4: Diversify a lot and protect your portfolio
Beyond a point, diversification doesn’t help. Imagine you pick 10 equity funds and all happen to be large cap oriented. It will result in a huge overlap in its underlying stocks.
Rather than just diversifying, look for diversity. If you are investing in equity funds, diversify it across large and midcap companies. About 3-4 funds are enough for a portfolio. Also endeavour to diversify across asset classes – equity, debt, and cash. In the past, asset prices of equity and debt have moved in the opposite direction providing protection to investors who were invested in both the asset classes adequately.