Patience And Perseverance Help You Create Wealth

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors

Wealth creation is an important goal for every investor. It requires investors to follow an asset allocation model and a disciplined investment approach to keep investments on track through their defined time horizons. Being a long-term goal, it tests the patience and perseverance of investors through various challenges that they encounter from time to time. These challenges emanate from the factors that impact the stock market and the economy, as well as how investors react to them.

At times, underestimating risks and/or overestimating returns causes anxiety in the minds of the investors and they often feel compelled to make haphazard decisions. And then, there are those who do not plan for this very important goal in the manner they ought to. In reality, one must have an investment plan in place and the conviction to stick with it during periods of market turbulence. By getting into the habit of planning and following that plan, one can avoid making ad hoc decisions and enhance one’s chances of creating wealth.

Similarly, understanding various risks associated with one’s investment process is quite important. While most of us equate risk with the potential of losing a part of our capital, there are risks such as inflation that don’t allow our money to grow in real terms. Besides, it would help to know that risk is an inherent part of investing and that there is a direct co-relation between risk and reward. The level and the type of risk would depend on one’s time horizon, i.e. the length of time one has to achieve one’s investment objectives.

For a short-term investor, volatility is a bigger risk than inflation. Therefore, the focus should be on capital protection through a portfolio consisting of interest bearing securities. On the other hand, inflation is a far bigger risk for a long-term goal like wealth creation. Therefore, for someone looking to create wealth over time, the real rate of return i.e. return minus inflation, becomes crucial in determining the level of success that can be achieved.

Another important aspect of one’s wealth creation process is the level of diversification in the portfolio. Diversification is important because it not only reduces the risk in the portfolio, but also allows it to perform in different market conditions. Asset allocation is a form of diversification that reduces one’s portfolio risk more than it compromises returns. When one invests 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 the portfolio.

Unfortunately, diversification is an aspect of portfolio building where a number of investors often err. The common belief is that more number of funds one invests in, the more diversified the portfolio is. It is a myth that investors have been following for years. In reality, in a portfolio that suffers from overdiversification, the returns get diluted as non-performing funds pull down the overall returns. Therefore, investors need to look at diversification from the point of view of the portfolio of the funds they are invested in and not from the point of view of their own portfolio.

Time diversification, i.e. remaining invested over different market cycles, is particularly important for long-term investors. It helps in mitigating the risk that one may encounter while entering or exiting a particular investment or category at a bad time in the economic cycle. It has much more of an impact on investments that have a high degree of volatility, such as equity or equity-oriented funds. Longer time periods smoothen those fluctuations.

Tax efficiency has to be an essential element of one’s investment plan. While tax efficiency alone should not drive the investment strategy, it can make a substantial difference to one’s wealth creation process.