No. 1. INVEST FOR MAXIMUM TOTAL REAL RETURN
When you invest, your ONLY AIM has to be to increase the family’s net wealth over a long term. This means the return on invested amounts after all costs, taxes and inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the effect of fund management costs, trading costs, taxes and inflation is wrong, and well almost stupid. It is vital that you understand the protection against INFLATION TOO. Once you factor in inflation you realize that savings bank accounts, fixed deposits, even public provident funds, Life Insurance Endowment policies, none of them protect purchasing power. One of the biggest mistakes people make is putting too much money into fixed-income securities – like the ones mentioned above.
Today’s Rupee buys a fraction of what it bought in the year 1986 or a slightly bigger fraction of what it bought in 2001 – when you may have started the public provident fund. Explaining this in every Wealth Session that I do is very difficult, but it is extremely rewarding. Our consumer prices have risen every one of the last 69 years.
If inflation averages 8%, it will reduce the buying power of a Rs. 100,000 portfolio to Rs 34,000 in just 10 years. In other words, to maintain the same buying power, that portfolio would have to grow to $194,000— a 94% gain simply to remain even over a decade – and this ignoring costs and taxes. All the best.
When I say Family’s net wealth it means that the big income earners should have ZERO money in bank fixed deposits etc because it is very inefficient from a tax point of view. So the bank fixed deposits should be in the name of the retired parents, or young children. For debt instruments (the minimum amounts) should be in ‘Medium term debt funds’ with growth option. Thus you convert the current income to ‘capital gains’ and pay lesser tax.
No. 2 INVEST—DON’T TRADE OR SPECULATE
The stock market is not a casino. I am surely not the first person telling you this. Sir John Templeton says that too! However if you buy and sell on a day to day basis, or even worse on an hour to hour basis, or trade options, you are trying to create a casino out of what is a market for businesses to raise money from investors. If trading is NOT your profession, and you do not have the scientific tools – like a George Soros would have – you may eventually lose all your money, or lose it so frequently that the market can start looking like a Gambling den.
As an equity broker I used to love the Trading clients, because at the end of the day we would see that most of our profits came from them! If you are an investor you will find that your profits are all lost to brokerage and securities trading tax! You may find a market you expected to turn down turning up (saw the impact of Donald Trump’s victory?) – and it may do other ‘irrational’ things – enough to wipe out your annual gains or even your net worth!
The longer term investor pays much lesser brokerage costs, securities transaction costs, taxes, – and this alone helps him improve his overall gains vis-a-vis his trading cousins. He is more relaxed, he is indifferent to many macro moves, to the American elections, to the demonetisation – and this ‘indifference’ to action makes him wealthy, really wealthy.
The traders are also called “Voluntary Contributors to the Broker’s welfare fund’ – choose what you want to do. IF YOU CANNOT MAKE TRADING YOUR FULL TIME PROFESSION, DO NOT TRADE. It is not a part time fun activity. Investing is easier.
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