Here is the basic, the most important reason for investing in stocks! This is the simple funda that Warren Buffet has used over 60 years to remain in the top 3 richest people of the world.
Its a long post, so your patience and attention is a pre-requisite.
10 years back, I realized that getting
Its a long post, so your patience and attention is a pre-requisite.
10 years back, I realized that getting
- 10% return annualised is quite possible
- more than 14% is extremely good
- more 20% is God-like. (In my view almost impossible to achieve over 20 years)
To give a perspective of things. (Assuming that most of you are around 30 and that want to save for another 25-30 years when you retire or your kids get married)
You Invest Rs. 1000 today.
The Table below shows the money you will have after the end of 15, 30 and 40 years respectively.
The Table below shows the money you will have after the end of 15, 30 and 40 years respectively.
| No of years | 15 | 30 | 45 |
| Rate of Return ↓ | Value after 15 yrs | Value after 30 years | Value after 45 years |
| 6.00 | ₹2,397 | ₹5,743 | ₹13,765 |
| 8.00 | ₹3,172 | ₹10,063 | ₹31,920 |
| 10.00 | ₹4,177 | ₹17,449 | ₹72,890 |
| 12.00 | ₹5,474 | ₹29,960 | ₹1,63,988 |
| 15.00 | ₹8,137 | ₹66,212 | ₹5,38,769 |
| 20.00 | ₹15,407 | ₹2,37,376 | ₹36,57,262 |
What is very clear is that over this time period,
1) The savings get roughly doubled in 30 years due to 2% change in the returns
2) If you could change your return from 8% to 15%, your returns get multiplied 6 times over 30 years and 15 times in 45 years.
3) If you could change your return from 6% to 15%, your returns get multiplied 10 times over 30 years and 40 times in 45 years.
4) 6%-> 20% Returns get multiplied 40 times over 30 and 250 times over 45 years!
Did u see the last one? 250 times! that is jaw dropping indeed.
Reflect for a minute how a person who saves 1/10th of you do could still be 25 times richer than You!
2) If you could change your return from 8% to 15%, your returns get multiplied 6 times over 30 years and 15 times in 45 years.
3) If you could change your return from 6% to 15%, your returns get multiplied 10 times over 30 years and 40 times in 45 years.
4) 6%-> 20% Returns get multiplied 40 times over 30 and 250 times over 45 years!
Did u see the last one? 250 times! that is jaw dropping indeed.
Reflect for a minute how a person who saves 1/10th of you do could still be 25 times richer than You!
How does that help us make financial decisions? What are the mistakes we could make?
- FD's, Bonds, fixed interest schemes etc generally give a return of 8-10%. The tax component is 30% if your earnings are above 5 lacs, so you end up getting 6% - 7% returns annualized.
- Insurance attached products of LIC: Give you slightly more, but they have tax benefits attached, so your savings go upto 8-10% slab
- Stocks (most risky) give you annualized returns of 15% and have no tax attached. more over if you include dividend income the return will increase by a percentage point.
How to minimise risks?
You do not understand Stocks
- Diversification over a portfolio of 25-30 stocks there is very little risk.
- No risk no return
- Don't invest if your horizon of invest is 5 - 10 years or less (Dont argue about this one!)
You do not understand Stocks
- Close your eyes, buy any index fund. (Index funds do nothing but simply buy everything that is on the index in the same ratio as its weightage. If sensex has 10% Reliance, your index fund will also have 10% Reliance. The transactions will generally suck up 1-2% but if you have no experience, this is probably the best option that you have)
- Read a bit, that is what this whole blog is for
- Not considered inflation, otherwise fixed return funds might look like the most stupid long term investment!
- Equities are generally considered not prone to inflation. (not many other investments can boast of this one)
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