If I say that you have "no" investments in equity (either directly or thru' mutual funds), I would be 90% right (simply because, less than 10% Indians have equities in their portfolio).
If I say that you don't invest in equity, because of the extreme fear of loss, I would be 99% right (simply because, you hate losing money).
For that matter, I too hate losing money. So I invest in equities.
Oops! That sounds quite contradictory.
Well, that's because, your definition of "loss" is quite different from mine.
Your definition of loss
If your investment of Rs.100 becomes Rs.95 after one year, that's a LOSS of Rs.5 for you.
In other words, in your 'investment dictionary' loss occurs when the value of your capital goes down below the original investment.
So you protect your loss, by investing your money, primarily in 'capital-safe' fixed deposits and insurance.
My definition of loss
If my investment of Rs.100 becomes Rs.105 after one year, that's a LOSS of Rs.5 for me.
Because, after a year, the goods and services that I need to buy for my family and me cost Rs.110 (due to inflation of 10%).
In other words, in my 'investment dictionary' loss occurs when the value of my capital DOES NOT match the rise in cost of living due to inflation.
So I protect my loss, by investing my money, primarily in 'inflation-beating' equities (which is not possible with fixed deposits, insurance, gold etc.).
[Besides, equities are lot more tax efficient than the fixed deposits.]
This is THE END of the story...
... for people who still prefer to continue with protection of their "capital" instead of its "value".
They need not waste their time, reading the rest of the article.
Meanwhile, an interesting discussion follows...
... for those who would like to change their perception about loss as 'loss in the purchasing power'
... BUT are worried about the "erosion in capital" often seen in equities.
Yes, I agree that investment in equities can erode your very capital.
But have you ever wondered, why?
Why do people lose money in equity?
There are two simple reasons for this:
a) Bad Stocks
b) Bad Markets
Let's explore each of these cases.
Most common investors are lay investors. They have absolutely no expertise, nor the experience to distinguish between good and bad stocks. Neither do they have the time, to monitor their portfolio on a regular basis. (It is utter stupidity to depend on hot tips, take ad hoc suggestions from friends / colleagues / TV commentators or believe the unscrupulous advisors.)
In such a scenario, it is no big surprise that they often lose money in stocks. Do you really expect an amateur cricketer to hit 100 centuries like Sachin Tendulkar?
Of course, not!
They why do you think that you, as an amateur investor, can beat the professional and experienced fund managers?
So the solution to 'bad stocks' is simple:
In order to MINIMIZE the loss due to bad stocks, all you have to do is to create a well-diversified and balanced portfolio of some good mutual funds.
This will ensure that
a) you will primarily be invested in good stocks, and
b) you will own a diversified portfolio, where despite a few losses your overall investment will be in PLUS.
However, as the time period increases, this volatility evens out. And the overall market trend follows the trend of the economy.
Hence, if you are confident about the Indian Economy in the long run, you should
i. neither be excited by the huge up moves,
ii. nor be terrified by the deep corrections.
Just keep investing, without bothering about the market movements.
Just stay invested, without bothering about the market movements.
This will ensure that
a) the short term aberrations of the market will disappear, and
b) with systematic investments over time, your overall investment will be in PLUS.
In short, the above strategy will almost eliminate the risk of losing your capital in the stock markets... and, of course, you will end up with 'inflation-beating' and 'tax-efficient' returns.
And, this is not some theoretical advice:
This is practically proven by the long history of the stock markets and mutual funds.
You have to simply forget one simple term... 'guaranteed returns'.
Because with guaranteed-return investments, there is a guarantee that you will NOT beat the inflation. In other words, depreciation in the value of your investments is guaranteed.
Instead, learn how to make money from 'market-linked' investments, by simply following the above-mentioned simple rules.
If you do so, it is highly (highly) probable that you will find tons of money in your bank account.
Lastly, have you read the Two biggest equity investing myths shattered?
If I say that you don't invest in equity, because of the extreme fear of loss, I would be 99% right (simply because, you hate losing money).
For that matter, I too hate losing money. So I invest in equities.
Oops! That sounds quite contradictory.
Well, that's because, your definition of "loss" is quite different from mine.
Your definition of loss
If your investment of Rs.100 becomes Rs.95 after one year, that's a LOSS of Rs.5 for you.
In other words, in your 'investment dictionary' loss occurs when the value of your capital goes down below the original investment.
So you protect your loss, by investing your money, primarily in 'capital-safe' fixed deposits and insurance.
My definition of loss
If my investment of Rs.100 becomes Rs.105 after one year, that's a LOSS of Rs.5 for me.
Because, after a year, the goods and services that I need to buy for my family and me cost Rs.110 (due to inflation of 10%).
In other words, in my 'investment dictionary' loss occurs when the value of my capital DOES NOT match the rise in cost of living due to inflation.
So I protect my loss, by investing my money, primarily in 'inflation-beating' equities (which is not possible with fixed deposits, insurance, gold etc.).
[Besides, equities are lot more tax efficient than the fixed deposits.]
This is THE END of the story...
... for people who still prefer to continue with protection of their "capital" instead of its "value".
They need not waste their time, reading the rest of the article.
 |
| We all HATE losing money. The question, however, is what does "losing money" mean to you. |
Meanwhile, an interesting discussion follows...
... for those who would like to change their perception about loss as 'loss in the purchasing power'
... BUT are worried about the "erosion in capital" often seen in equities.
Yes, I agree that investment in equities can erode your very capital.
But have you ever wondered, why?
Why do people lose money in equity?
There are two simple reasons for this:
a) Bad Stocks
b) Bad Markets
Let's explore each of these cases.
A. Bad Stocks
Investment in bad stocks will result in a loss. Investment in good stocks will (most probably) result in a profit. This is the simple rule of the share markets.Most common investors are lay investors. They have absolutely no expertise, nor the experience to distinguish between good and bad stocks. Neither do they have the time, to monitor their portfolio on a regular basis. (It is utter stupidity to depend on hot tips, take ad hoc suggestions from friends / colleagues / TV commentators or believe the unscrupulous advisors.)
In such a scenario, it is no big surprise that they often lose money in stocks. Do you really expect an amateur cricketer to hit 100 centuries like Sachin Tendulkar?
Of course, not!
They why do you think that you, as an amateur investor, can beat the professional and experienced fund managers?
So the solution to 'bad stocks' is simple:
In order to MINIMIZE the loss due to bad stocks, all you have to do is to create a well-diversified and balanced portfolio of some good mutual funds.
This will ensure that
a) you will primarily be invested in good stocks, and
b) you will own a diversified portfolio, where despite a few losses your overall investment will be in PLUS.
B. Bad Markets
More often than not, in the short term, markets move up and down due to 'sentiments'. It has nothing to do with the underlying businesses or their profitability per se.However, as the time period increases, this volatility evens out. And the overall market trend follows the trend of the economy.
Hence, if you are confident about the Indian Economy in the long run, you should
i. neither be excited by the huge up moves,
ii. nor be terrified by the deep corrections.
Just keep investing, without bothering about the market movements.
Just stay invested, without bothering about the market movements.
This will ensure that
a) the short term aberrations of the market will disappear, and
b) with systematic investments over time, your overall investment will be in PLUS.
In short, the above strategy will almost eliminate the risk of losing your capital in the stock markets... and, of course, you will end up with 'inflation-beating' and 'tax-efficient' returns.
And, this is not some theoretical advice:
This is practically proven by the long history of the stock markets and mutual funds.
You have to simply forget one simple term... 'guaranteed returns'.
Because with guaranteed-return investments, there is a guarantee that you will NOT beat the inflation. In other words, depreciation in the value of your investments is guaranteed.
Instead, learn how to make money from 'market-linked' investments, by simply following the above-mentioned simple rules.
If you do so, it is highly (highly) probable that you will find tons of money in your bank account.
Lastly, have you read the Two biggest equity investing myths shattered?
