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Why investing is all about behaviour

The three scenarios given below, will show you that to create wealth, more than the markets you need the intervention of your own behaviour.

What we do know from historical experiences and data is that investing in equity gives the most efficient outcome if you remain invested for a long period. However, creating wealth is about a lot more than just making that one investment for 10,15 or 20 years. 

Creating wealth is as much about maximising your savings as it is about being regular and picking the right asset class. Let’s look at it another way; the Nifty 50 index has grown 6.3 times since January 2000 or given an annualised return of roughly 10% for the last 20 years and 5 months, till the end of May 2020. How could an investor maximise wealth through these 20 years?

The three scenarios given below, will show you that to create wealth, more than the markets you need the intervention of your own behaviour. 

Scenario 1

Let’s say in year 2000, you earned or inherited Rs 10 lakh and decided to invest all of it in the equity market via the Nifty 50 index. You were patient through the ups and downs of the technology bubble in 2000, held strong through the global financial crisis and through the currency crisis of 2013. Finally, at the end of May 2020, you are likely to have grown the original amount to an accumulated value of roughly Rs 63.2 lakh. 

You showed the patience that’s required to make long term investing successful.

Scenario 2

Let’s say you didn’t have this lump sum and instead decided to become a regular investor with the little that you could save in a month and started investing Rs 10,000 each month in equity via the Nifty 50 index. In a similar time period as above, you would have invested Rs 24.5 lakh in all, which means 245 months of regularly investing Rs 10,000 at the start of each month. 

Changing your behaviour to focus on maximising savings and investing regularly is what gets you the most success, rather than trying to figure out whether you have a large sum of capital to begin with. 

This investment at the end of May 2020 would amount to an accumulated value of roughly Rs 81.5 lakh.

By focusing on being regular you can create long term wealth with small amounts too. 

Scenario 3 

In this case, you realised that your income keeps increasing, which means higher monthly inflows and hence, decided to increase your regular monthly investment by 10% every year from January 2000. We assume you start by investing Rs 10,000 in equity via Nifty 50, at the start of each month and increase this by 10% in every successive year.  

Again, for the same period as above, by the end of May 2020, you would have invested roughly Rs 72.2 lakh which would have grown to an accumulated value of roughly Rs 1.57 crore. 

By making this small change in your investment strategy you are able to invest up to six times more every month by the year 2020 and create a lot more wealth without worrying about lump sum gains. 

Changing your behaviour to focus on maximising savings and investing regularly is what gets you the most success, rather than trying to figure out whether you have a large sum of capital, to begin with. 

The third scenario assumes a kind of certainty in profession success reflected in steadily increasing salary which one can no longer be taken for granted. This is the reason its even more critical to start early with your investments even if it means starting small and building up over a long period. 

 

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