Last Updated on October 21, 2021
Here is a set of slides from the DIY investor meets that hopefully might convince you that there is more to investing than getting high returns. That is, a return above inflation (called a real return) is only one side of the investing coin.
Consider some product or a service or a fee that costs 10L today. For an inflation rate as shown below (8%), the cost will increase with time as shown by the blue line.
The green line represents the growth of the monthly investment amount at the average annual interest rate as shown above.
After 19 years the value of the investment will overtake the cost. Meaning we would have to wait 19 years to make the purchase.
The real return (approximately) in this scenario is 12% -8% = 4%
Now, what if the inflation was 10% instead of 8%?
When the inflation increases to 10%, it would take 30 years to make the purchase for the same investment. The return is still above inflation, but that does not help much. The purchase is significantly delayed. Why?
Now consider this,
More than double the investment, with less than half the return, a real return of about -2% produces the same result as a real return of +4%: purchase after 19 years.
What if we invest like we would expect a real return of -2% in an instrument that would give us a positive real return?
What if we invest 10200 each month in an instrument that has the potential to deliver double-digit returns?
Unfortunately, many do the opposite. They invest less than the required amount (10,200) in instruments that offer negative real returns.
Loss of capital
Loss does not always mean a negative balance or an actual decrease in value.
The result: permanent loss of capital (notice the gap between the curves at 19 years). I use the word permanent because these are the people who are scared of notional short-term losses. They may never be able to make the purchase.
Not investing enough is an ailment that can affect those who hope to earn a real return too!
A real return of +2% means nothing if one does not invest enough.
There is yet another side to this story. Those who can only invest little (say 1500 pm) cannot take excessive risk in the hope of getting a higher real return. This scenario,
can be produced in an excel sheet but is unlikely in real life. At least it is quite uncommon.
What is the point of this post?
When an expense crops up (planned or unplanned) the only thing that matters is the money available us. At the point in time, the return we have got, and how much it is above or below existing inflation rates is irrelevant.
The goal of investing is to obtain a big fat corpus.
The goal is not to beat inflation. The goal is not to obtain a real return.
The goal is to recognise the importance of inflation. Inflation can be overcome in two ways:
1) investing in aggressive assets. That is in assets with potential to earn a positive real return (return higher than inflation)
2) investing enough capital. This could even be in assets with a guaranteed post-tax return lower than inflation.
You can beat inflation by investing in FD/RD or endowment policies by simply investing enough. See here for an example.
Don’t criticize the product or the agent who sold it to you. Nothing wrong with the product. Most people want guaranteed returns without understanding that the associated price is a huge increase in the necessary investment.
The second suggestion may sound bizarre to you. I am not suggesting you do that, for that would be an inefficient way to work your money.
I suggest that you combine the two ways:
Invest in an aggressive asset like equity, a sum that you will have to invest in a non-productive asset (like fixed deposits or endowment policies).
That way you can go beyond goal-based investing and create wealth. That is, have a surplus relative to your expenses at any point in life … after a certain age.
There is more to investing than high returns. You need to invest as much as possible and as often as possible. Otherwise high returns won’t amount to much.
Download the visual goal planner (the calculator used to make the above slides)
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 700 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 2600 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 600 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
My new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author
M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] comAbout freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)