KUNTAL CHAUDHURI
CERTIFIED FINANCIAL PLANNER
M- 9433240927
There is no one line answer of the above question. Money has 3 simple uses : 1) Takes care of routine known expenses. 2) Covers sudden unexpected expenses. 3) Provides for known large aspirational expenses in the future.
We should take care of all the three parts. The 1st one needs a regular income to cover all the routine regular expenses. 2nd one needs insurance and an easily accessible emergency fund. For the 3rd one investment requires in the growth assets that will appreciate in value over time - one should invest surpluses regularly and routinely for long term wealth creation. We generally sacrifice our long term future of investment for the current comfort of seeing a fat balance in the bank account. Sometimes we forget the basic purpose of money – Money is nothing but the medium of exchange. If the exchange value of money diminishes over the time, we are practically taking enormous risk – knowingly / unknowingly.
Normally we take care of the first part. The second part is the tricky one. Many of us paying high insurance premium but not fully covered – Term insurance / Protection plan can help you in this regard. In case of investment few people consider it as quick money making instrument!
What if the market crashes and we lose money?
First of all we should invest for the long term. Equity in the good period makes so much money that bad period can never wipe out that. In addition to that we should not expect linear return from the equity market. There will be ups and down but over the time all the subsequent highs will be higher than the previous high. So don’t worry – stay invested and only liquidate as per your goal / target.
Recipe for Investment success
Success in investment depends 80% on the psychology of the investor and 20% on the methodology ( one can read my previous article – INVESTMENT PSYCHOLOGY ). Large number of investors normally don’t get investment success because of the Behaviour Gap. Behaviour gap is the difference between the investment performance and investor performance. Many equity / balanced mutual funds are providing 15% - 20% CAGR over the last 15 years. How many of us are enjoying that return? Retail investors like to book profit in the wrong way and normally they don’t get the chance to get in again.
We are almost genetically encoded to want more of what gives us short term pleasure and get away as fast as we can what gives us short term pain but long term gain – we feel the pain of loss much more than the pleasure of gain. Each and every one of us know that walking and exercise is good for health ( but it’s short term pain to get long term gain) – seldom we follow it. Similarly there must be fall in the market but one should not be panicked – instead they should invest more for their long term benefit. In addition to that one should reallocate and rebalance their portfolio over the time to achieve better risk adjusted return.
