Ten Ways of Killing Long Term Wealth Creation
Opportunities
The
title of the article may surprise you but believe me people always look for
killing the opportunities of creating long term wealth creation. Though most of
them say that they are committed to long term goals but somewhere midway they
lose interest or their short-term desire takes over. I have picked 10 ways of Killing
Long Term Wealth Creation Opportunities. You are free to add more if you
wish to.
1. 1) Stopping
SIP – This according to me is the strongest
weapon to kill the wealth creation opportunity. How? Let’s have a look at it.
Mr. ‘A’ started SIP of Rs. 100000/- (one lakh) to achieve the retirement goal
of 10 crores in 20 years. Today people think it is a very big amount but 20
years down the line, will not be. But ‘Something has come up’ reason
comes and Mr. ‘A’ stops SIP of Rs. 50000 after 5 years. Now let’s see the
impact of this discontinuation. Instead of 10 Crores Mr. ‘A’ gets Rs.5.54
Crores, shortfall of Rs. 4.46 crores.As per original plan he would have
invested Rs. 2.4 Crs. over 20 years to get 10 Crs. but because of stopping SIP
he invested 1.5 Crs. to settle for Rs.5.54 Crs. (#
Return assumed @12% CAGR)
What
a way to kill the opportunity !
2. 2) Pulling
out money for ‘that urgent need’ from long term corpus
– Once again ‘Something comes up’. Typically, this ‘Something’ is a
vacation, car buying, house renovation etc. This time Mr. ‘B’ who had invested
1 Cr to achieve the goal of 10 Crs over 20 years but after 6 years something
comes up and he takes out one crore from the investments which has grown to 2
crs. He took out 1 Cr from the performing investment because he is in love with
that endowment plan of insurance which gives 6%-6.5% return. Anyway,
fortunately he doesn’t redeem further and after 20 years he gets approx. 5
crores. Therefore, in total approx. 6 crores. Killed opportunity of 4 Crs. (#
Return assumed @12% CAGR)
3. 3) Timing
the market : More money has been lost in waiting for
the correct time. It is next to impossible to time the market consistently. As
famous investor, John Bogle says "The
idea that a bell rings to signal when investors should get into or out of the
market is simply not credible. After nearly 50 years in this business, I do not
know of anybody who has done it successfully and consistently."
4. 4) Not
doing the home work: It is very important to do
the homework. Many a times people invest their hard money without understanding
the product. They just follow random advice and take a plunge, to repent later.
5. 5) Not
understanding the difference between Need and Want- Easy
money available on EMIs, Credit card and show off culture has changed the
spending pattern of the society considerably. In the race of one up man ship,
people end up spending on Wants without thinking twice whether
they really Need those things. Such a behavioral change the
society is witnessing, kills the opportunity of wealth creation.
6. 6) कम
इन्वेस्टमेंट
की
बीमारी
– A very common question often comes, What’s the minimum
investment requirement? How come one’s goal has anything to do with minimum
investment? And then people try to negotiate with the GOAL, which is a reality
but just to prove themselves they invest lesser than the required. For ex –
instead of requirement of Rs.50000 to achieve Rs. 5 crores, one invests only
Rs. 25000 to settle for Rs.2.5 Crore and ends up compromising in life. Saved 60
lakhs to miss out 2.5 crore. What a kill ! (#
Return assumed @12% CAGR)
7. 7) कम
समय
के
लिए
इन्वेस्टमेंट
की
बीमारी
– This is really funny. One’s mind is conditioned to invest
in mediocre endowment plan for 20 years, PPF for 15years but the same guy wants
quick return from market linked products. In fact, it should be other way
round. Let’s understand this by following example.
|
Investment per month (Rs.) |
Rate of return |
No. of months |
Value of investment |
|
|
50000 |
12% |
240 |
50000000 (5 Crs.) |
|
|
50000 |
12% |
180 |
25228800 (2.52 Crs) |
|
|
50000 |
12% |
120 |
11616953 (1.16 Crs) |
By
lessening 5 years i.e. from 20 years to 15 years, one can kill the opportunity
of creating extra Rs.2.5 Cr.
8. 8) Underestimating the burden of tax and
inflation –
Most
of the investors tend to ignore the burden of tax and inflation. Check this, an
FD offering 7.5% interest gross may actually fetch only 5% interest for the
individual in highest tax bracket. Assume inflation at 5%, the net return would
be 0.
Net
return = Gross return-Tax-Inflation
Instead
of investing in tax efficient debt funds, people kill the opportunity of
creating wealth creation.
9. 9) Over
exposing to assets emotionally – Darlings of
investments are real estate and gold. Traditionally people invest in these two
asset classes just because they are tangible, can be shown off. Over and above
it also sucks the liquidity and disallows the partial redemption. Real estate
in particular has helped in killing the opportunity of wealth creation.
1 10) Falling
prey to tall claims – Often so-called long-term
investors fall prey to tall claims of Ponzi schemes due to greed.
Thus, kill the opportunity of long term wealth creation.
So,
be aware ! Be a wise predator !!
-
Mr. Vinayak Sapre
-
Financial Coach
