We all know the actual definition of the word investment. It is nothing but putting your money in some product to grow. However, in this post, I will try to explain 5 unknowing meanings of investment.
What is the difference between Savings and Investment?
Let us first understand the basic difference between savings and investment. Many of us will not find any difference in it. Let us understand the difference.
Savings means just keeping aside part of your income whereas investment means putting that money in any financial products to grow that money. For example, keeping money in your savings account is called as savings. However, putting the money in any product like RD, FDs, Mutual Funds or Bonds to earn additional income from that money is called investment.
We Indians, are great savers but poor investors. By doing so, we diminish the value of our own money.
This is the basic definition of investment which many of us know already. However, there some other definitions of investments, which you must know. These 5 unknown meanings of investment.
5 Unknown meanings of Investment
1. Investing requires CALM and composed MIND
Yes, investing requires calm and composed mind than looking at your portfolio frequently or taking actions on some good or bad news. We often look at our investment return whenever there is a fall in the market. Unable to understand the volatility nature of equity market, we often commit mistakes. Mistakes may be like withdrawing the accumulated corpus or switching to some other product or fund.
It is easy to say but hard to practice. But this is how the wealth can be created. We humans are typically loss averse in nature. This means we forget the returns which we gained but repent more about loss. Also, the meaning of loss will be real only when you liquidate or come out of the investment.
Refer this Wikipedia article on human behavior of Loss Aversion.
To be a calm and composed investor, you must avoid the news based items related to investment. Review your investments once in a year is enough. Never try to follow or compare your friend portfolio or products he/she investing.
2. Investing is the process of randomness but not precise
Let us take an example of retirement planning. You assume many things to arrive at retirement corpus and those are as below.
Your tentative retirement age, inflation of your expenses, life expectancy, return on investment, lifestyle change during retirement, taxation during retirement and many more.
Look at these numbers. You notice that all are ASSUMPTIONS. Nothing is precise. Then how to achieve your financial goals?
None can say that his financial plan or investment is PRECISE or perfect. It is based on some assumptions which may change over a period of time. Hence, never be in a wrong belief that by buying a product or investing in a product means you are investing in the BEST product available in a market.
You have to be ready for many changes like a product you are investing today may be a worst product after few years. Hence, investing is the process of adjusting to changes rather than assume to be PRECISE.
Especially if you are investing in a product which is volatile in nature, then you must be ready for that randomness than precise. None can predict so surely about future volatility.
3. Investing is SIMPLE but not rocket science
Yes, investing is simple. But these so-called finance professionals made it complicated that you MUST rely on them to invest. Keeping it simple will make sure that you understand of what you do.
For example, keeping one savings account, one credit card (if you feel really a NEED), one term insurance, one health insurance or 2-3 equity mutual funds and 1-2 debt products to manage your investment. But look at many and see how they complicated it.
Spending 1-2 hours a week is enough to manage your own money. Investment is nothing but common sense rather than anything.
4. Investment is boring and lazy exercise
Investment does not mean that you must look at your portfolio or product performance on daily or hourly basis. But it requires boring and laziness. However, see the data of equity mutual fund investors in India. Only around 40% equity investors hold more than 2 years. Rest 60% will either switch or withdraw money within 2 years. Strange realities but these are facts published by AMFI data.
There are wonderful benefits of being boring and lazy! You hardly look for peer comparison. You just ignore news based actions with your investments. Like if the market falls today, then you never bother but keep on investing systematically.
Therefore, never track news items and act. Instead, always follow the basic principles of investments.
5. Investment does not require intellectual super human brain
Your IQ or professional expertise in your field is nothing to do with wealth creation. All it requires is the life of living within your reach. Understanding the basics of creating wealth. Investing in right product to reach your financial goals. Common sense prevails over your IQ or professional expertise in your field.
Theories, thesis, a super computer brain will not create wealth. But a simple logics of what I explained above are enough.
Refer this post of Forbes, where they say “Research carried out by the Carnegie Institute of Technology shows that 85 percent of your financial success is due to skills in “human engineering,” your personality and ability to communicate, negotiate, and lead. Shockingly, only 15 percent is due to technical knowledge. Additionally, Nobel Prize winning Israeli-American psychologist, Daniel Kahneman, found that people would rather do business with a person they like and trust rather than someone they don’t, even if the likable person is offering a lower quality product or service at a higher price.”
Any other points to add? Agree or disagree? Use comment section for sharing your views.