Much is said and done about creating wealth so as to enjoy a good future. Many have tried and failed in this process and many are still struggling. So, WHAT is this wealth creation all about?
- Wealth creation is a method of accumulating income generating assets over a long period of time.
- According to Wikipedia- Wealth means, the abundance of valuable resources or material possessions; basically this means that you are wealthy if you have a lot of something that others value.
WHY is there a need to create wealth
The answer is very simple- We all aim to create wealth to fulfil some or all of our desires and goals in the long term. Wealth is created for various reasons like a happy and comfortable retirement, Education and marriage of children, Health care emergencies, buying a house or going for foreign trips, or may be to handle a crisis situation. Hence to meet these goals or expenses one needs to religiously set aside a sum to create wealth in long term.
Finally the big question is HOW do we create wealth?
EARN - First step towards wealth creation is earning money.
SAVE – then we come to the most obvious part – Saving. If we do not save a stipulated portion of our earnings then we would never be able to create wealth for ourselves. In order to create wealth we need to cut down our present consumption to meet future contingencies.
The above pyramid helps us understand the steps involved in wealth creation.
- Any person should be well aware of his present networth and his financial goals. It makes the task of wealth creation easier, as to how much we have and what more is required.
- The next step being eradicating any debts. Because unless and until we clear our liabilities we won’t be able to enjoy the freedom of utilising our assets.
- Post this step begins the actual journey of wealth creation. The more knowledgeable we are and the more information we collect about the financial markets we shall be able to employ our resources to optimise returns. But just gathering information will be of zero use if we do not save and invest accordingly. Planning and implementation of plans is required to create wealth. And along with this we should leverage opportunities that come along. It means turning situations into our favour with minimal efforts.
- And finally protecting our wealth by way of sensible and logical actions like investing in high income generating options without capital erosion. Balancing the portfolio and re-balancing it time to time.
Though the whole thing seems easy, it is not. Choosing the correct investment avenues, investing in it continuously over a long term and balancing the portfolio time to time makes the whole process a very difficult job. Add to it the following reasons and you almost give up the whole process. Let us see why creating wealth is not a child’s task:
Reason 1: Uncertainty of continued earnings
A government employee, who is not forced to face the uncertainties of job change, layoffs, retrenchments, termination etc., enjoys his position till compulsory retirement. But then only a handful of Indians enjoy a Government job while others are in the private sector where continued employment in one company is not guaranteed. There is another section of investors who are self-employed like businessmen or professionals. The fear of cyclical or uncertain earnings always looms over them. Some may be fortunate enough to generate equal and handsome earnings for themselves throughout life, but this is rarely true. Economic conditions, Political state of affairs, industry scenario and global markets are some of the many reasons which affect the certainty of regular income flows.
Reason 2: Investor may not be able to contribute the desired sum every month throughout the investment period
As we grow our expenses grow with us. When a man is single his earning seems to be quite large but when he gets married and has kids that same earning takes care of the entire family. Food, shelter, health, education are some of the expense s that eats away the majority of the income. Other than the basic necessities, growing aspirations and lifestyle changes calls for a huge expense. People now go in for plush apartments, big cars, hi-fi mobiles and gadgets, eating out, foreign tours etc. and break their investments to meet these expenses or may not be able to save as much as desired and required.
Another big reason is that inflation affects us all. The prices of goods and services are ever increasing but our spending power is not in line with the increasing inflation rate, hence even though we continue to earn regular income but inflation may not allow us to invest regularly.
Reason 3: lack of knowledge in investing
Each one of us has different levels of risk tolerance. Some of us may be very aggressive and some of us may be quite conservative when it comes to choosing asset classes for investments. But to maximise our returns, apart from personal appeal towards investment vehicles we should try to rationally understand what suits us best. But in India very few people understand their investment objectives. This is simply because of lack of awareness and education. Though equity mutual funds provide good returns, they associate fear with equity investments. It is not their fault; due to lack of knowledge many investors have lost their lifetime earnings in the stock markets. Majority of people who put money in stock markets are not investors. They deal in equities to make windfall income and are basically guided and dependant on tips and news which they get from their friends, colleagues or brokers. The fear of capital erosion prevents most people from investing in stock markets. But this is not true; if the investments are done in a systematic manner then this would not happen. These wrong investments could never generate good returns and thus have an adverse effect on the wealth creation process.
Reason 4: The investor becomes impatient and gets allured or perturbed
Why do most of us go for fixed interest bearing options? The simple reason being that we can see money getting added to our capital throughout the investment period though the returns are small. But this is not true for Mutual Funds or equity investments. Due to inherent nature of stock markets, the market volatility would several times take our investments through a roller coaster ride, even though the past returns indicate the ride finally ends on upward slope in the long term. But whenever markets go down we get panicky and sell our investments at a loss, and whenever it has already peaked we try entering.
But the great Warren Buffet has rightly said- “Be greedy when others are fearful, and be fearful when others are greedy.” This statement may help most of us if we invest in equities particulary when the markets may not look good.
Control over fear and greed is very essential for a long term wealth creation.
The above graph shows the BSE index performance over more than 30 years. It is quite evident that the slope has an uptrend. According to https://en.wikipedia.org/wiki/BSE_SENSEX “The Sensex has increased by over twenty five times from June 1990 to the present. Using information from April 1979 onwards, the long-run rate of return on the S&P BSE SENSEX works out to be 18.6% per annum”. This is despite the volatile nature of the equity markets that we are aware of. But still, our fickle nature works to our disadvantage and we fall prey to the short term gains and losses.
Reason 5: Interim withdrawal of funds by the investor
Finding a disciplined investor is hard. It is quite natural for any of us to get attracted towards money and that too if we see that in our own accounts. The attraction to splurge on that trendy gadget often takes away a major proportion of savings and puts a dent on our long-term corpus. We start investing and if we see that we have built up a considerable corpus we tend to forget the goal for which the corpus was created. The goals of creating wealth should be clear and precise and that’s why investors advise a goal-oriented saving approach for a financially free future. To get the desired corpus we should not disrupt this goal-oriented and disciplined savings process but, alas, we often do and then we create a hue and cry over the inefficacy of our savings when the fault is ours!
It is difficult to create wealth but not impossible. ‘To gain something we have to lose something’ goes a famous saying and it is so true. We have to overcome the above-mentioned reasons if we are serious about creating wealth. We should overcome our own fear and greed to build our much-desired wealth castle. We were not born with a silver spoon, but we can definitely earn it through a dedicated investment approach free from the above hindrances. Keep upgrading your skills and knowledge to ensure that your earnings grow. Be dedicated and disciplined towards your investments. And the last word - All the Best!
We recommend you to read – Common Mistakes Mutual Fund Investors Make and The Balanced Way Of Investing In Mutual Funds
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.