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If I invest a lot more in equity will I reach my goals faster?

The rate of return can drive investors to invest all their savings here irrespective of goals. The assumption they hold is that if it can grow their money the fastest then if they invest more, they will grow their money even faster.

Yes, but there is a big condition attached.

One of the main attractions of equity as an asset class for goals that require big sums of money is its rate of return. At an expected 12% pa, it is the highest among all asset classes.

This is also exactly why many invest in this asset class for the wrong reasons. The rate of return can drive investors to invest all their savings here irrespective of goals. The assumption they hold is that if it can grow their money the fastest then if they invest more, they will grow their money even faster.

Here’s the problem with this idea

Equities grow your money through something called capital gains. In simple terms, the value of what you own goes up. In the case of equities, you own stocks and shares of companies or units of equity mutual funds. To better understand how your money goes up, read this.

Now this growth in value is something that happens in the stock market. If more people want to buy something, its value goes up. Since the economy, in general, tends to do better over time, so do the companies that make up the majority of that economy.

What this means is that equities don’t show “linear” or pretty looking straight-line growth. The growth is punctuated by short term falls. Some recover, some don’t. This lack of linear growth is the crux of the issue as to why you need to give time to equities. This is also why it’s generally a better idea to invest in equities via instruments like mutual funds.

But companies go through both good times and bad times, and so does the economy. This is reflected in the stock prices and thus you end up with something called volatility. There is also the chance that some companies go wrong and wind up shutting down. This is all part of the economic system that is capitalism.

What this means is that equities don’t show “linear” or pretty looking straight-line growth. The growth is punctuated by short term falls. Some recover, some don’t. This lack of linear growth is the crux of the issue as to why you need to give time to equities. This is also why it’s generally a better idea to invest in equities via instruments like mutual funds.

What does this “non-linear” growth mean for you?

Simply this, the growth in your investments over the long run will not look similar to what you see in the short run. If the markets are doing great now, you might see outsized returns in the short run. Similarly, if the markets are doing badly now, you are likely to see big falls in your returns and portfolio value. 

In the long run though, it all tends to balance out. The outsized market falls and the outsized market growth spurts tend to merge to create a slight upwards growth that is not nearly as exciting but still better than other options like fixed income, real estate, or gold.

This also means that simply investing more is not necessarily going to get you to your goal faster in the short run. Having said that, investing more is definitely likely to cut years off of your time required if you are talking more than 10 years.

What would take 15 years might take 12 years. But what will take 15 years is not going to suddenly come down to five years or less, simply because you invested more. Sure, you could get lucky, but the odds are as good as betting in the casino. 

So, don’t shy away from investing a little extra in equities when and if you have the money, but remember that this will bring your goals nearer only if they are more than 5-10 years away and you are giving a minimum amount of time (7 years or more) to the equity investment.

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