Power of Compounding - 8th Wonder

Great wealth was never made during prosperity. The seeds were sown when there was extreme pessimism. Seeds sown at pessimism becomes the tree at the  time of prosperity.  The  period since 2008, has been a period of volatility. The extremes of the earlier decade caught up in early 2008 and since then it has been a period of disillusion. Rome was not built in a day. So  is the wealth creation journey. Do you know what was your first take home salary and what is it now. Did it grow overnight or happened gradually. Same is it with your investment.  You cannot have your expected return overnight , but if you  go with goal based investing, using asset allocation , understanding your risk profile, a double digit annualised return over 5/7/10/12 years can be expected.

 Real Estate has been the favourite Asset class in the last decade. And continues to be so. However, now the time  has come to exercise caution in this asset class. The runaway bull run which was witnessed across any property, is a thing of the past. Do tread with caution .

Gold again has been in a 5 year bull run, outsmarting all other asset class, except Real Estate. Again being overweight in this  over longrun,is not recommended. A 10-15% allocation ( being prudent) is the approach recommended .

The investing methodology being practiced currently by the majority is adhoc ( ok. I have ‘x’ amount and tell me what will I get. The financial intermediary based on the product incentive, pitches a product , and well the sale is made).

Its time you revisit this and go in for a goal based investment.

The Power of compounding which comes on account  of this will be :

At 15% CAGR,Rs. 1 becomes nearly :  ( acknowledge the inputs of Prashant Jain – HDFC MF) 

2 in 5 years

5 in 11 years

10 in 17 years

20 in 22 years

And if you take  a more conservative return of 12% CAGR,Rs. 1 becomes nearly :

1.76 in 5 years

3 in 11 years

7 in 17 years

12 in 22 years

So you see that a 3% additional return has a big impact on your wealth creation.

Investments are never bought , they are sold. You buy your house, you buy your car, you buy your clothes, but when it comes into wealth creation laziness takes over you ( not for all ). Why ??????

Well, act now. Have a goal based investment schedule and watch your wealth grow. You are the Arjun in this ‘Kurkshetra’

What should I do now?

Headlines today do not inspire confidence. So much of gloom being painted , primarily because of the after effects of aggressive financial methods and leverage and hand-in-glove of the politicians and policy makers. 

If the situation does not improve in the next 12-18 months, this decade could well end up as the ‘ lost decade ‘. So when everyone is being fearful from the greedy,  it is the time to pick and choose.

If you have planned your investments with a goal and time horizon, with asset allocation in place, no need to panic .

If you have not, do have a financial plan in place and act as noted as above.

Also, with fireworks expected in Eurozone and with policy paralysis by the Govt. of India, the economic environment looks gloomy. Staggered purchases in equity with overweight on debt instruments could also be an approach worth a merit.

Real Estate also would play up. But only if you know what you’re doing and do not need funds for the long term.

All in all ,  the ghost of 2008 seems to be visiting. However, as we say, this too shall pass….

What you need to do is have your goals and asset allocation in place and trust your gut and avoid the noise in the media.

Do understand it’s your behaviour which will determine your wealth .

·         If loss aversion is the key ( long term debt funds  with a horizon of 12-18 months is the one for you)

·         If status quo is your style ( then again overweight on debt instruments is the way)

·         If controlled risk taking is the one ( which means you can sleep t night with the volatility around you, have an equity exposure of atleast 20% of your portfolio

Whatever you do,  trust yourself and ask if this is what I would do, and then go ahead.

Happy Investing .. Remember , not taking a risk is also a risk.