Wealth means abundance & wealth with respect to money means the abundance of money. It is impossible to create wealth simply by earning more. Wealth creation is a process in which you invest your saved money by selecting investments that suit your financial goals, hence, you need to understand what works best for you financially.
There is no one-size-fits-all portfolio as each investor is different with different goals. That’s why you need a strategy or a proper financial plan taking into account your risk appetite & time horizon of your goals. Financial planning is a step-by-step guide to managing your finances & achieve your financial goals in a disciplined manner.
Financial planning helps you to increase your savings, create wealth, combat inflation, prepare you for emergencies & also manage your money in the best possible way.
Here we will bust top wealth creation myths that people believe in.
High returns are the only key to creating wealth
One of the most important aspects of investing is to get substantial returns but those returns are of no use if the saved amount is not substantial. Eg- If we save Rs.10000 at 20% we get 2000 but if Rs 50,000 is saved even at 10% the return comes out to be Rs 5000. Hence, it is important to save & build a substantial corpus along with investing to reap the benefits of higher returns
You should know how to time the markets if you want high returns
It is often said that timing the market is not as important as time in the market. The truth is it is impossible to time the market because it is based on a host of factors and you cannot control those factors. These factors can range from stock-specific factors to sector-specific factors. To gain higher returns one must invest through SIPs, as the name suggest systematic investment plans are systematic periodic investments for the long term which gives you the time to ride out the highs & lows of the market.
Long-term investors should invest & forget
It’s a popular myth to believe that if you are a long-term investor you should just leave your portfolio & see the magic of time. While some people constantly churn their portfolio which is the other extreme. Let’s avoid both the extremes & go for a periodic check of your portfolio, it is advisable to do a quarterly or half-yearly check to ensure correct asset allocation across various asset classes. Rebalancing is necessary when you see your portfolio deviating from your targetted allocations.
Money in assets = to money in hand
Having liquid funds makes you confident in facing any contingencies and secures you in times of crisis. Having wealth blocked in real estate or the market makes you financially vulnerable to external shocks. Investments in the stock market are extremely volatile & not liquid. Therefore you should have an emergency fund that is easily accessible, you never know how long an emergency will last, so setting aside money for an emergency fund that will last at least 3-6 months is preferable. You can easily spread the emergency fund across liquid assets, short-term RDs, and debt mutual funds.
More diversification leads to a less risky portfolio
People believe that diversification is the key to a healthy portfolio, which is true! But that does not mean that over-diversifying will reduce your risk. Over-diversification will lead to confusion & unnecessary stocks in your portfolio, also you end up paying extra fees without any diversification benefits.
Even if I start late, I can make up for the lost time by investing more
We always tend to think that we will start investing once we earn more, arent we the best procrastinators? We think that investing a larger amount later will cover up the delay we are doing now, but this is far from the truth & we are losing out on the compounding gains for that skipped period.
Let’s take an example of this. There are two people, Mr.A & Ms.B, B started investing Rs.5000 from now with a monthly investment increment of 5% with average annual return of 12% for 35 years, & A starts investing five years later with Rs.10000 with same monthly increment & same returns but for only 30 years.
As shown above, just 5 years of lapse led to the difference of 18 lakhs.
Fixed Income instruments are best for wealth creation
It’s a common mindset to earn fewer returns on investments than to lose your money in riskier schemes. Hence people are more inclined toward saving funds in PPF, FDs, etc. They tend to forget that playing safe is holding them back. Because historically long-term returns on equities & mutual funds are comparatively higher than FDs.
Savings can make you wealthy
Saving money is important. It ensures financial freedom, It helps you to avoid debt & to have a contingency fund, but will your little saving build your wealth? The answer is no, especially in todays time of soaring inflation. The times when savings dont grow at the same rate as inflation, you effectively lose money.
Choose the highest yielding funds & relax
Another myth about investing is that once you invest in the highest-yielding funds & keep investing indefinitely will give you higher returns. We tend to forget that with higher returns comes high risk! Hence, Putting all your eggs in one basket is never a good idea, you should always have a well balanced portfolio. A balanced portfolio is spread across all types of assets ranging from highly volatile to safer instruments.
Warren Buffet – “If you don’t find a way to make money while you sleep, you will have to work till you die”.
Disclaimer: This write up is solely for educational purposes.
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