In India the one question that will never go away is “Kitna Deti Hai?” meaning how much does it give? The statement has arisen from the automobile industry, wherein a vehicle is always measured by its fuel efficiency.
Thus, higher the fuel economy greater the sales, irrespective of other features which may by far exceed in advantages. In personal finance we often face a similar situation, wherein our next investment option is chosen by historical data and not on financial goals for which the investment is made.
Even though there are thousands of books or articles which from the bottom of their heart suggest past performance does not guarantee future returns, still the urge of missing out takes over our heart and we end up in the wrong place at the wrong time.
Temptation of higher returns is tough to sustain, however if you opt in for one of these, you might learn your mistakes in the hardest possible way. Returns are often deceptive, because of the market volatility, which is almost impossible to predict.
Take the period of 2020 march when nobody could have thought the world would be shut down. In this article we will study why targeting returns is futile, while goals are the ones to watch out for.
Why returns are necessary yet unimportant
Imagine running in an opposite direction on a treadmill, now the running treadmill is the evil known as inflation, whereas the salary or income which is running in the opposite direction is you.
As long as your pace is more than that of a treadmill you will survive but as soon as you slow down, you are going to get hurt. Since earning capacity has an expiry, but the expense capacity isn’t, you always require someone to keep running the opposite direction, here the investment comes into picture. Now as long as the speed of the returns on this investment exceeds the speed of inflation (treadmill) you are safe.
Therefore, investment without returns can be fatal and you may end up in a complete mess of a situation. Sometimes returns could be positive but not sufficient enough or not worth the hassle paid for it. Each individual has a unique lifestyle which he or she does not want to alter.
Therefore, going by the fact of maintaining such lifestyle you could figure out how much you will need at the time of retirement. Indirectly you know the return which you require to maintain your lifestyle post retirement. So now all you need is to invest in such avenues, which matches or exceeds the expected rate of return.
Why goals are important and trustworthy
Each financial goal requires different time frames of investment, and each time frame gives you the risk appetite one may afford. When we have goals, we know our requirement of funds and the time span within which we need to achieve them. This simplifies our task rather than thinking about timing the market and being under the fear of losing our money. Each financial goal could be assigned a financial asset, like a fixed deposit or a liquid fund could help cater our short term needs like a foreign vacation.
Similarly midcap or large cap funds could help us design our long term needs. Diversification could prepare you for any risk, so that if one investment is in loss, the other could balance it out. Keeping a moderate return expectation could help you plan in advance and lead a peaceful career as well as life.
Whereas when you target return, it could lead to frustration, unhappy and miserable living. Thus, if you plan early, stick to it and review it regularly, you have a higher chance of achieving your goals and that too without losing your peace of mind.
So why not return, why goals?
When chasing returns, you always jump into hasty decision making, generated by the hype of an asset class. While choosing any asset for investment, each of us must analyse its pros and cons, its risk metre and after giving due regards to our investment objective coupled with our risk-taking appetite we must choose or reject it.
However, this does not happen while chasing returns, reason being the fear of missing out. Human beings are social animals, who are easily influenced and therefore end up in unwanted situations very easily.
Let us take an example of Rahul who invested in the equity market on the suggestion of his friend that he can become rich in no time. Rahul invested in equity just before the covid period and as covid wave hit the country, stock market went down hard and Rahul had to sell his entire investment at huge loss. Nobody predicted that a pandemic would hit the country and the market would crash, however now after two years people learnt the lesson in the most difficult possible way. An Anjali who started investing in mutual funds at the same time, has now almost doubled her investment and is on course to achieve her goals.
Timing the market is impossible however, achieving the financial goals sounds more practical and sensible by planning, investing, consistency and watchfulness.
Viral Bhatt is the Founder of Money Mantra - a personal finance solutions firm