Why perfection can be the enemy in investing There is so much to spend, and its so easy not just to spend what you earn but to spend what you will earn in the future. To overcome all these problems, its important to make a beginning
Dhirendra Kumar
CEO, Value Research
A few days ago, I made a video titled ‘Where should you invest for the next 10 years?’ for the Investors’ Hangout section of Value Research Online. This topic is not new—far from it. This is a question that I have been fielding regularly since I founded Value Research three decades ago. In a way, this is the central investor problem that Value Research is here to solve. Of course the part is a figure of speech, what investors actually mean is ‘for a long time’ or ‘money that I don’t need for the foreseeable future.
In my video talk, I gave what I would call my ‘analyst’ answer, one based on an evaluation of time periods, growth, volatility risk, and so on. That’s the way any investment decision should be made. However, on this page, I will discuss a different dimension—one based on human psychology. This aspect is especially pertinent for the beginner investor. What happens is that some beginners are generally quite worried about making the wrong investment. That’s not a bad idea, obviously, but for some people, it leads to what is called analysis paralysis. They feel that they must arrive at some perfect investment choice, one which does not compromise anything.
Unfortunately, this is a hard, almost impossible thing to be sure of. As the saying goes, “perfect is the enemy of good”. So here’s my prescription, whose goal is to cure this particular disease first: Just get started. Investing in any mutual fund, as long as it is equity-backed. There are only two simple rules. One, it should be a diversified fund and not a thematic/sectoral fund. And two, you should invest through SIPs and not a lump sum. That’s all. You could choose a large cap fund or a flexicap or a large & mid cap or an index fund or whatever. You don’t have to be clear about what precisely these terms mean. Just go to Value Research Online and locate some equity funds that seem OK and start a SIP.
The reason why I’m recommending it is that the highest priority of the beginner investor is to overcome inertia. It’s easy to see where this inertia comes from. Have you ever noticed how when you read about investing and personal finance in the news or on social media, it always seems like the biggest issue is people not choosing the right stocks or mutual funds? They always identify this as the real problem for investors.
Well, actually, that’s not the real problem at all! In fact, the real problem is that most people aren’t investing at all, or they’re not investing enough. They are waiting for the perfect investment. Because of this, many people start investing too late in life or never get started at all, and then when they do finally invest, they don’t put in enough money. So, it’s not just about choosing the best mutual funds or hottest stocks. The key is actually getting started and investing consistently over time.
The saying goes that ‘better late than never,’ and maybe it’s true in most areas of life. However, in savings and investments, starting late is much worse than starting early. How much worse? Let’s say that you want to turn your money 10 times. To do that, 30 years at a return of 8% a year is equal to 20 years at 12.2% and 15 years at 16.6%. Please read that again and think about it—absorb what I’m saying here. Starting late is a much bigger problem than starting with something suboptimal and then correcting it. Inertia is your real enemy. For young people, there are plenty of other impediments to investing. One is the curse of a consumerist society. There is so much to spend, and it’s so easy not just to spend what you earn but to spend what you will earn in the future. To overcome all these problems, it’s important to make a beginning. Just begin somehow, anyhow, with anything. That’s all that’s needed. The rest just follows.
(The author is CEO, VALUE RESEARCH.)
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
