The choice is yours — systematically grow your wealth or systematically deplete it…
Do you know that most of us are earning a salary but not necessarily creating wealth? As shocking as this may sound, a recent survey showed that 95% of Indian households still invest money in physical assets, i.e. gold or real estate. One more form of investment which is really preferred by most investors in India is bank fixed deposits or term deposits. While these asset classes look really attractive, historical data suggests that they are hardly beating inflation which in very simple terms mean that forget creating wealth, in actual terms, your hard-earned money is getting eroded year after year.
Let’s go a little bit deeper into the problem, it is very clear that inflation is the biggest reason for this systematic depletion of wealth. Around 20 to 30 years years back, inflation used to be in the range 2% to 4%, therefore even earning 5% after taxes was fine, as at least the wealth was not depleting. So, for our parents’ generation, this was not a big problem. However, for our generation, cost of living is going up more than 7% to 8% y-o-y which is resulting in this systematic depletion of wealth. The reason why this is a massive problem is because if we do not do anything about it now, our wealth will deplete systematically over the next 10 to 20 years, eating into our retirement corpus.
There is already a retirement crisis for people who are in the early 40s-50s age group and a growing feeling that they have not prepared well enough, for their retirement years. The major dilemma that they face is that they have either not saved enough or have saved their wealth in the wrong asset classes. This will lead them to continue working in their 60s and it will not get easier as they might have to reskill themselves to match pace with the current (and future) work demand.
So, what is the solution to this? This definitely requires a lot of financial planning however a great starting point is ‘financialisation’ of our savings.
What is ‘financialisation’ of savings?
In simple terms, it is a process of transferring wealth from physical assets to financial assets such as mutual funds, insurance, stocks etc.
Well, if we know the solution then why everyone does not do it straight away. This is not as straight forward as it seems. In a country like India which is obsessed with real estate and buying gold, this would require a massive change in mindset. People also prefer to put their savings into fixed deposits as this at least ensures that the capital is protected.
There is a mental block against equity markets. There is a large chunk of people who are still scared of putting money in the stock market as they think it is gambling. The mental shift would require a few things to be understood clearly:
1) If you have to beat inflation y-o-y, you will have to take reasonable amount of risk
2) You do not have to put all your life’s savings into equities. You can use smart asset allocation strategies to ensure systematic wealth creation
3) By investing in equities, if you are investing in solid businesses, you can use the power of compounding to grow your wealth.
I sincerely believe that I would require separate articles (if not a book) to cover details for these 3 points above but to start with:
1) Look at your current asset allocation
2) Start analysing what kind of returns you are getting now
3) Are you able to beat inflation on an annual basis? If not, there is a wide array of investment options which can help us achieve our long-term goals.
The choice is ours –
Consistently compound in equities or consistently deplete in physical assets!!!
