Time, pragmatism and pessimism

Editor's Note Dhirendra Kumar’s insights and timeless advice for investors --------------------------------------------------------------- 14-September-2024 --------------------------------------------------------------- Dear {NAME}, Every Saturday, I share my perspectives on a topic investors will find useful. This time let’s look at why saving more and longer trumps chasing unrealistic returns in building wealth. Time, pragmatism and pessimism Do you want your investments to make more money? Who doesn't? There are many solutions to this problem, but only two sure-shot ones. One, invest more; and two, give it more time. Preferably, do both. To some people, this must sound like a joke or, worse, a mocking answer. But this is 100 per cent true. These are my solutions, the ones that will always work. Many expect investment analysts to unveil some magical technique – a perfect blend of investment types and timing that can transform modest savings into substantial wealth – for instance, turning monthly investments of ₹20,000 over a decade into a crore. Such unrealistic expectations are common among investors. However, it's crucial to understand that some financial feats are simply unattainable. The crux is that investing is more than merely a theoretical exercise. At the end of your investment journey, your savings must meet a tangible life goal. Overly optimistic calculations can be counterproductive, often encouraging people to save less than necessary. Predicting future market conditions with certainty is impossible. Every projection, whether from individual investors, seasoned analysts, or financial experts, is an extrapolation based on assumptions and historical trends. Instead of seeking more precise predictions or higher-yield investments, it's wiser to accept that absolute accuracy in financial forecasting is unattainable. The better approach is to expect the unexpected. Moreover, it's important to recognise that surprises in the financial world are more likely to be negative than positive. The most reliable strategy for securing your financial future is to save more and for longer periods. A significant challenge is that the vast majority of people either don't save at all or don't save enough. Those who do save often do so without genuine awareness or foresight, failing to project their financial needs into the future. This lack of planning prevents them from realising the need to save more and more effectively. The investment media bears some responsibility for this situation. Focusing extensively on where to invest inadvertently sends a subconscious message that inadequate savings growth can be remedied simply by finding better investment opportunities. This narrative dominates financial discussions and shapes savers' questions about money management. However, the real solution often lies in addressing the fundamental issue: most people simply need to save more. This challenge is made worse by increasing life expectancy. In India, for instance, life expectancy at age 60 has risen to 17.8 years, up from 14.8 years in 1990. This significant shift in the average suggests that some individuals, particularly those with access to better nutrition and healthcare, are living considerably longer. This trend will likely continue, implying that retirement savings may need to sustain individuals for 25 to 30 years or more. To meet this extended timeline, savings will need to generate better returns – which, as we've established, is likely to be challenging. Even if higher returns are achievable, there's no substitute for saving more. Currently, most people save whatever they can spare or an arbitrary amount driven by tax-saving considerations. A more effective approach involves projecting future financial needs and working backwards to determine the necessary savings. It's advisable to err on the side of caution in these calculations – assume higher future expenses and lower investment returns. This conservative approach can be challenging, as the human mind (particularly those inclined towards investing) tends to gravitate towards optimism. While optimism is generally a positive trait, it can be detrimental when projecting investment returns far into the future. Being pragmatic is not very easy, but pragmatists end up better off. --------------------------------------------------------------- Thank you for being a Value Research Insider. I hope you found this note useful and interesting. What did you think of today’s note? 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