As human beings we do not understand risk much. Our brain gets excited when Tragedy is combined with Mystery. And we have no clue of what is tragedy. The Jury is still out on whether death is a tragedy!
We worry about ‘risks’ that hit us suddenly, in big numbers (air crash), mysterious (nuclear leakage), but not about things which could really impact us (road safety – drunken driving, dozing off while driving, not wearing a seat belt, poor car maintenance, over eating, lack of exercise etc.).
Take the American context – I would be worried if my daughter told me that she is going to a friends house if the friend’s father had a gun. Guns scare us. However 2 girls aged 15 could be in far greater danger of trying alcohol and drowing in a swimming pool.
Take the case of Investing. People worry too much about volatility in a portfolio, and not about the ABSOLUTE returns over a long period of time. If you do not have time or the inclination to invest in direct equities or managed funds, go and do a SIP in an index fund. YOU JUST CANNOT GO WRONG if you do a 10 year SIP. Over this period you will see the markets go up, go down, some funds beat the index, some under perform the index. As long as you promise YOURSELF that you will not worry about VOLATILITY, you will get awesome returns adjusted for inflation.
The catch phrase of course is “You should remain cool”.
Even when ET does an article like how you could have got only PPF returns over 20 years, you realize that it is either a stupid article or an article which has picked up the date PERFECTLY. The year 1993 was one in which equities gave 65% returns – it takes a couple of years to recoup such a sprint, does it not?
So such articles FEED on the risks that scare. The ET will not come out with an article showing the impact of inflation on wealth. Why? because it is far more difficult to do.
So here is a challenge – take 3 scenarios – assuming a nice portfolio (even Sensex is fine) see the impact of timing – one person who bought at the TOP every year from 1979 to 2014, one person who bought only at the bottom every year, one who did a flat investment every month….YOU WILL BE AMAZED TO SEE THE IMPORTANCE OF time (n) of the compounding formula. The impact of r is at best marginal.
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