Retail Investors: Slow and steady will win the wealth creation race
Authored by Rishi Piparaiya – Best-selling author and financial mentor
A job gives you income, but that is not wealth. Likewise, putting aside some of your income is saving, but that is not wealth either. To create wealth, especially as a retail investor with limited time and expertise in financial matters, you must invest your money, keeping some basic principles in mind. We shall look at some of those here:
Have a long-term perspective
You need a long-term perspective if you want a sure shot at creating wealth. Of course, some people could get lucky and make a fortune overnight–whether by gambling, speculating, or taking unreasonable risks. But such cases are few and far between. Instead, if you have a long-term perspective and do just the basic things right, you can make sufficient wealth, and that too without much risk. So be patient.
Go big on equities
Equities are one of the sure-shot asset classes that will create wealth in the long run. Take just the Indian equity markets–if you had bought into the index at any point since 1980, around when it started getting formally tracked and held onto your investment for at least ten years, you would have never lost money. On the contrary, you would have multiplied your investment five times on average. So, while you should diversify and invest in different asset classes, you do need to participate strongly in equities. Buy good stocks, or just the index, and hold onto it for a decade or more, and you should do just fine in your wealth creation goals.
The markets are much more powerful than any of us, and there is no joy or success in trying to time them. You will never know the best moment to buy or sell, and you can never time your decisions to perfection. So, what you should do instead is take the emotion out of investing and be consistent. Invest in the markets systematically and per your planned strategy and schedule, irrespective of what is happening around you. Do not be fearful if markets are falling or greedy if they are rising–do what you must do, and do not doubt the process.
Equity Mutual Fund SIPs are an excellent solution
One of the most straightforward strategies a retail investor can adopt that covers all the above principles is to start Systematic Investment Plans (SIPs). Invest some amount of month systematically each month into good equity mutual funds or index funds and with a long-term perspective. And do this month after month without getting swayed by emotions, and you will be well on your way to creating wealth. For example, a SIP of Rs 5000 per month could grow to roughly Rs 25 lakh in 15 years, assuming equity markets return an average of 12 per cent p.a., which, while not guaranteed, is not an unreasonable expectation.
Everyone struggles to make easy money; the irony is that it is easier to create long-term wealth. Just follow the basic principles–think long-term, invest a large part of your assets in equities and be consistent.