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When you read about investment and personal finance in the media or social media, the biggest problem appears to be that people are not investing in the right stocks or mutual funds. The entire subject of investing appears to be essentially about choosing the best mutual funds, or the hottest stocks. This is an illusion. The real big problem is that most people are not investing at all or investing too little. They start too late in life, sometimes they never start and then they invest too little.
The saying goes that 'better late than never,' and maybe it's true in most areas of life. However, in savings and investments, starting late is much worse, much worse than starting early. How much worse? Here's an example. Let's say that you want to turn your money 10 times. To do that, 30 years at a return of 8 per cent a year is equal to 20 years at 12.2 percent and 15 years at 16.6 percent.
Please read that again and think about it - absorb what I'm saying here. 8 per cent per year is not a trivial rate of return but is not difficult to achieve on a sustainable basis - everyone reading this publication would be confident of doing so and most would succeed too. In 30 years, it'll turn your investments 10 times.
But if we waste the first ten of those thirty years, then to make our money 10 times, we will need to earn at 12.2 per cent a year. That's not so easy and in fact would require a reasonable amount of skill, perseverance and the right attitude to do so. Moreover, it would involve investing a fair proportion in equity which would bring with it volatility and need a certain mental toughness to tackle.
However, most people actually waste more than the first ten years of their investing life. Or someone who starts earning at 22 or 23 years of age, it is not uncommon to reach almost forty years of age before starting to invest seriously. This brings us to the almost impossible part of the equations above. To earn 10 times in 15 years, one needs to sustain 16.6 per cent a year. Only a small proportion of investors can do this, and then too chance will play a role. I'm not saying that this cannot be done, but it's not something that anyone can rely on happening.
There's a story that Albert Einstein was once asked what humanity's greatest invention was and he replied, "Compound interest." While we are not talking about interest income alone, the compounding of investment returns is essentially the same thing.
The biggest impediment to not being able to earn enough from investments is not choosing this or that fund or stock or strategy but not starting early enough. There are two kinds of reasons that people do not start early enough. One is simply the curse of the consumerist society. There is so much to spend and it's so easy to not just spend what you earn but to spend what you will earn in the future. This is compounded by another problem - when a young person wants to save and starts to look around for information and guidance, they come across numbers so large that their own savings potential looks puny. Social media is full of people claiming to do monthly SIPs of 50,000 or a lakh and investing lakhs in stocks. Someone who has just started earning and can maybe spare one thousand rupees a month feels that it's a useless and embarrassingly small amount so might as well buy another pizza or that new pair of headphones!
That's the problem. In reality, even a few hundred rupees a month in a recurring deposit in the bank where you have an account is fine as a beginning. Just begin somehow, anyhow, with anything. That's all that's needed. The rest just follows.
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