If I were to ask someone why do you want to invest? The most obvious answer would be to earn returns. That’s true. But if I were to recommend to invest in equity funds to do so, then people would just say “It’s risky, I want to invest in something which gives me guaranteed returns.” The reason we look for guaranteed returns is because we want to avoid pain or discomfort. The question is what you are investing for Comfort or Financial freedom?
Seeking comfort or freedom is not about where you choose to invest i.e. in debt or equity or real estate. But it’s about where you choose to invest for your different financial goals.
For instance, if you want to build an emergency fund and you invest this money in a tool wherein the returns are more or less known to you (fixed income products), then you are on the road to seek financial freedom. The motive here is to keep money at your disposal, hence it makes lot of sense to be defensive as the need can arise anytime.
But if you were to do the same thing for your kid’s higher education (10-15 yrs. away) or your retirement (15-20 yrs. away), then you are definitely aiming for comfort and not financial freedom.
Good Experience = Safe Investment
Often when we invest, the first thing we ask is “Is it safe to invest here”. However, definition of safest option changes from person to person. For instance, some may find real estate to be the safest and best tool while others may find RD or FD or Insurance Plans to be the best and the safest. The difference of opinion arises due to our experience with different asset classes and wherever people make money they presume that asset class to be the best. The so called safe investment is nothing but your comfort of investing in a particular tool based out your experience or experience of your near and dear ones.
Comfort gives us sense of security but does it really gives security of fulfilling the goals we are investing for? Think about it!!
Investing for Now or Future
We save to fulfil certain goals of our life such as kid’s Education, their wedding, Retirement etc. However savings alone would not be enough, they have to be invested. But “Do you invest for today or tomorrow”? You must be wondering what a crazy question this is; of course investing for tomorrow.
What you don’t know is that your comfort of investing in fixed income or guaranteed return products makes you invest for today. For instance, a company which gives you a projection that if you invest X amount today, you will get Y amount after 15 years does not tell you that numbers which look big today would be peanuts tomorrow. The biggest threat to your long term goals is inflation. If you are investing for tomorrow, invest in assets that offer growth and beat inflation in long run.
Equity – A friend or foe of your investments
Be it your kids’ education (10-15 yrs. away) or your retirement (15-20 yrs. away), by far diversified equity funds are the best tools to plan for them. But one of the biggest reasons that people avoid them is that they come with a lot of fluctuations. They are volatile but only in short run. And as I said they are the best tools but for your long term goals.
Since performance of diversified equity funds can be monitored at a click of a mouse, people keep a track of its performance every minute, every day and every month. And rate it as volatile. But the same people do not monitor real estate or FD’s or RD’s because their performance cannot be monitored at a click of a mouse. Remember long term does not mean few minutes or months or a year or two. It means a decade or two.
It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right – but it’ not rational. Invest for your financial freedom and not what seems comfortable to you.