When I speak to people I ask them some very pointed questions. Yes it does make them a little uncomfortable, but I get some amazing insights. Here is one.
My Question: What is that one thing that can derail your wealth creation process?
IN case you have not asked yourself this question, first try to answer it yourself and then read what is ahead.
For many people the main cause of their ‘wealth’ not being created is ‘the markets not doing as well as they think it will’. For a few people who had been burnt by incompetent advisers, it is poor advice, for a few it is inability to earn well….etc.
HERE is my summary of what can go wrong in a wealth creation process:
- Wealth is a state of mind: So the amount of ‘wealth’ that will make you feel wealthy is not easy to guess and it can be different for different people. So I will not get into the amount, but now I know too many people who think it is their right to get 8% p.a. in PPF, 9% p.a. in voluntary pf, and 19% p.a. in equities. I know many advisers who argue ‘if my client cannot get EVEN 19% p.a. in equities, why should they be in equities’ – and this after a 2% amc cost. Well 21% for 30 years? Well fairy tales are still legal.
- Not contributing for a long time: You understood the power of compounding in the early 30s. You started the process in your mid 30s and you lost your ability to contribute at age 55. Please do not expect to create too much wealth in 20 years time. You need to be goddamn lucky to do that. You need to find that ‘Golden Run’ which some of us were lucky to find 2002-2007 when we were sitting on Infra, Power and Banking stocks. Remember if your portfolio was Bhel, it went up 100 times, the index went up 7 times, and the FMCG went up less than that. So having the lucky right portfolio EVEN in that period was just providence.
- Finding a fraudulent adviser / incompetent adviser / having poor personal finance knowledge: Not sure whether this needs too much of explaining. However, if you do not understand the power of equity, power of compounding, volatility, patience, etc. I doubt whether you will create serious wealth.
- Withdrawing too soon: If you are expecting to create inter generational wealth, you should not withdraw the capital at all during your lifetime. However if you have to withdraw you should delay it till say you are 80 – simply because if you do live till 93 you might STILL substantially reduce your wealth!
- Not having adequate medical insurance/ emergency fund: this is one solid reason why people interrupt their compounding, and completely upset the wealth creation process. Have seen it too often.
- Poor asset allocation: Too much money in one asset class because you ‘think’ that the IRR will be greater than 19% which you KNOW you are entitled to in equities. Aka Real Estate. Worse, refusing to use excel to calculate the RE performance.
Wealth is a mind set..i have met people with a NW in excess of Rs. 10,000 crores (and I do not wish to trade places with him, in my mind he is a misogynist and his daughter too tells me that). I have also met a couple who are school teachers in a Municipal school and just not ‘worried’ about their retirement (Subra both of us have a pension you know?)…I do not think that wealth and happiness are connected. Happiness is a state of mind, and you can achieve it without wealth. Wealth helps in spreading the sunshine, that is all.
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