Welcome to the first edition of Dhan ki baat!
You might wonder if this is a pick on the other Mann ki baat. To tell you frankly, it is.
You know I write mainly about personal finance and investments, Dhan ki baat is the only thing I can do best.
It is said that to acquire genius and expertise, you need to work hard on the basics till they become second nature to you. That’s also called laying the foundation. I guess same is true for investing as well.
Let’s cover something fundamental today. You might have read about it before or heard from someone. It is still a good reminder.
I got a call recently from a client. He was not feeling very good about his fixed deposit investments. The returns had dropped a lot. They were not attractive any more. He had allowed them to just roll over automatically for several year.
“The interest rates have dropped. The 30% tax rate is cruel. After inflation, I am hardly left with anything. Can you tell me something which gives me a better return adjusted for inflation and taxes?”
He made an important point. Let me repeat it.
Your real enemy in wealth building is inflation.
Let’s say your personal inflation is at 10%. This is the rate at which the prices of what you consume on a day to day basis, increase. (Don’t go with the government rates!)
When your net return is less than inflation you lose value of money and hence, you become poorer. So, if you are earning 8%, you are actually losing money. Even if it is 10%, you just get to preserve the value of money.
This is like running on a treadmill. You keep running but reach nowhere.
Only when your investments get you a return more than the rate of inflation, your wealth increases. So, if your average net investment return is 11%, you are increasing the value of your money by 1% every year. Assuming average inflation stays at 10%.
The question is how do you do it?
One of the best things I heard about investing is that you can be truly wealthy only when you figure out a way to make money even when you are sleeping.
One of the ways and the more difficult one is to start your own business. That could mean committing a lot of time, money and effort.
The second and a simpler way is to invest in existing businesses – to buy their shares / equity.
So, you can take as little as one share of a business as possible and you would have a readymade business setup working for you.
Not every business is worth your money and hence the trick lies in finding the right one to invest in.
That’s where the stock market comes into picture. It makes it easy to buy those companies or their shares.
“Makes sense. But where are the markets going? Are there opportunities still?”
Well, the markets are going same place as before, to deliver long term better inflation adjusted returns and help you grow your wealth.
As for the current opportunities to invest, there can be plenty. Do your homework.
If you still don’t know when and how, you should get an investment adviser to do your personal Dhan ki Baat. S/he will help you focus and avoid costly mistakes, thus leading you to become the best investor possible in you.
Remember you have to make money even when you are sleeping.
That is all for today.