Are You Doing Enough To Create Wealth?

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors

All of us aspire to create wealth over time so that there are sufficient financial resources at every stage of our lives. However, not many of us do enough to achieve this very important goal. Since wealth creation is an ongoing process, it is important to create a portfolio suited to achieve this goal and follow an investment strategy that has the potential to deliver the desired results over a defined time horizon.

Remember, your time horizon begins when you initiate your investment process and ends when you need to take the money out, either as a lump sum or in a phased manner. The length of time you can remain invested is important because it can directly impact your ability to tackle risks associated with your investments. Longer time horizons allow you to take on greater risks, with a greater potential to earn better returns as some of those risks can be reduced by investing across different market environments. If you are keen to make wealth creation a realistic goal for yourself, here is what you need to do.

First, you need to realize the importance of staying ahead of inflation. Inflation is crucial as it reduces the value of your investment returns over time. Therefore, your portfolio returns must keep up with the rate of inflation to protect the value of your investments. Unfortunately, many of us either do not recognize the threat of inflation to our wealth creation process or are not sure about the right ways to tackle it.

As is evident, the key is to earn positive real rate of return.

While the nominal return represents the growth rate of your money, the real rate of return represents the change in the purchasing power of your money. Simply put, it is actually the real rate of return that indicates whether your money is growing in value or not. Since most of us keep focus on the safety of capital and invest a major share of our investible surplus in traditional options offering guaranteed returns like FDs and small savings schemes, this important aspect of earning positive real rate of return gets overlooked. Equity, as an asset class, can help you stay ahead of inflation in the long run. However, tackling the risk of volatility in short and medium term can be quite a challenge. Considering that volatility in the stock market is a natural phenomenon, you must be prepared to face periods of ups and downs. Simply put, the key to investment success lies in tackling these volatile periods by following a disciplined approach and keeping focus on long-term investment goals.

A case in point is the current market situation. Even though the stock market appears to be in an indecisive phase at present, there is no reason for investors following a disciplined approach and/or investing in equity mutual funds with a clearly defined long-term time horizon to disrupt their investment process. Remember, events like general elections can drive the market in the short-term, but fundamentals rule in the long run. The father of value investing Benjamin Graham explained this concept by saying that, in the short term, the stock market is a voting machine, but in the long run, it is a weighing machine.

The second important aspect in wealth creation process is the level of diversification in the portfolio. Diversification is important because it not only reduces the risk in your portfolio, but also allows it to perform in different market conditions. Asset allocation is a form of diversification that reduces risk more than it compromises returns. When you invest in two different asset classes that tend to go in opposite directions in different market conditions, the combination is likely to have a stabilizing effect on your portfolio.

Considering that volatility in the stock market is a natural phenomenon, you must be prepared to face periods of ups and downs. Simply put, the key to investment success lies in tackling these volatile periods by following a disciplined approach and keeping focus on long-term investment goals.