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What trees can teach us about investing

Like growing a Chinese bamboo tree, there are no instant gratifications. You need to stay put and keep the faith in equities.

Chinese bamboo tree is a fascinating tree species. Unlike other trees that grow gradually and in a linear way – its growth patterns are unique. 

Fifth time lucky

Plant the seed of the Chinese bamboo tree and nothing emerges from the ground in the first year. Another year goes, and still you wouldn’t spot any outwardly growth. 

In the third year, the story continues with still no signs of life emerging from the soil. And so it happens in the fourth year. 

Planting a Chinese bamboo tree is definitely not for the faint-hearted, as it tests your patience and endurance levels as a gardener. 

However, in the fifth year, a miracle happens. Within six weeks, it rises to a stupendous height of 90 feet. Or tall enough to match a nine-storied residential building of a metropolitan city. 

The initial four years of toil might seem a futile effort. However, all these years, the tree was meticulously laying its roots - deep and wide - underground in order to sustain its fast external growth in the years ahead.  

Keep the faith

Investing in equity is similar. You might invest systematically into equities for years, with no signs of any growth. However, if history is any indication, market always lays a solid foundation (say by shedding excess valuations) before you witness a bull run. 

For instance, for the period 1994-2003, Indian stock market - as measured Sensex - remained flat at 3,800 levels. Ever since, it appreciated more than five times by Jan 2008 to give a CAGR of 13.6 percent over the period 1994-2008. 

Like growing a Chinese bamboo tree, there are no instant gratifications. You need to stay put and keep the faith in equities.

Depending on the weather and soil conditions, you choose the tree. Similarly, you pick a fund that suits your understanding of how much risk you can realistically take and those meeting your targeted financial goals.

Take your pick

Some species of trees suit a specific climate and soil. Some are wood-bearing - like mahogany, oak and acacia – which grow tall and sturdy; others like mango are tender and fruit-bearing.

Depending on the weather and soil conditions, you choose the tree. Similarly, you pick a fund that suits your understanding of how much risk you can realistically take and those meeting your targeted financial goals.

Some trees like Papaya bear fruit within a year, while a mango tree takes three years or more. Similarly, there are various types of funds to suit your varied investment needs. Liquid and short-term funds are for your short-term goals, while equity-oriented funds are for the long haul.  

Diversification

Often, tomatoes are grown along with marigold (in close proximity) and beans with carrot. Such intercropping cultivation confuses pests and reduces pest attack. In contrast, walnut trees are grown in isolation.

You need to similarly choose a set of funds that work together. Having a mix of equity and debt funds, for instance, helps you manage risk and volatility better. 

You might plant a flower in November and not see it blossom for a year. Likewise, investments take time to mature.

Start small

In a culture of instant gratification, the natural process of growing trees may seem like an eternity.

However, you need to start early – albeit small and invest in equities. It will help you reap the benefits of power of compounding. 

Like a Banyan tree, your financial wealth can outlast generations, if wisely chosen. 

Takeaway

Investing in equities is akin to planting a Chinese bamboo tree. It requires years of patience and traits of endurance. Sow the seeds of investing right now. 

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