I was out for lunch with some of my old friends. After some light chit chat, we started discussing savings and investing. Being an earning member of their family, with some even running small businesses, most of them admitted they are regular savers. But when asked how many of them invest, only 2 out of 6 invested with only 1 of them investing in stocks! This didn't surprise me.
An old survey (around 2011) revealed that less than 2% of Indians invest in the stock markets.
Now, people with a lot of debt or with low income won't invest. But India enjoys one of the highest savings rates. So people do have surplus funds to invest in stocks. Why don't they?
What keeps more people from investing?
Only one word comes to mind - Fear.
And it isn't even the legitimate kind based on facts. Most of it is to do with the lies they have been told over the years. And as the saying goes - 'Repeat a lie often and it becomes the truth'.
So here are some of the most common lies that people have come to believe, keeping them away from investing in stocks.
'I don't invest in the stock markets.' 'They are so risky.'
Most of my friends gave me the same reason. It is a common excuse used by people for not investing in stocks. But they aren't entirely wrong.
Sure, the stock markets are risky. But only for those looking to make a quick buck by gambling away their money on tips from friends and families. It isn't risky for diligent long-term investors making informed decisions. For them, it's a great way to create long-term wealth.
Stock markets across the world, including India, have a long history of growth and are ideal for long-term investing. As long-term investing mitigates all risks that are inherent with stock investing. Top of the list - volatility. As when you hold stock over a long period, you let it ride through the troughs and peaks of the market allowing it to reach its potential and generate strong returns.
The BSE SENSEX had generated a return of 12.5% (annualised) since 1990. (This is after factoring in the index levels of 36,000). You certainly can make higher returns. The key is to not only pick good investments but assemble a perfect assortment of investments that work well with each other. Ensuring they reflect your financial goals.
Honestly, I think not exposing your long-term portfolio to stocks is far riskier. As the returns from your other less flamboyant investments won't match the rate of inflation, eventually reducing the purchasing power of your money.
‘Only an expert can make money from stocks''. ''Investing is tough'
It doesn't surprise me that most people believe this lie.
Tune into any financial news channel. You will find news anchors and 'experts' rambling on, using financial jargon. Alpha, beta and what not. Further complicating the process of investing, making it sound like rocket science. All of which can easily confuse or intimidate anyone.
But that is not what investing is all about. Mr. Warren Buffet also says - 'Investing is simple, but not easy.' To realise that you need to cut through all this 'noise' and listen to successful investors. Peter Lynch, Warren Buffet, Charlie Munger, Philip Fisher. Pick any. They all say the same thing. Investing is simple. You just have to buy stocks whose businesses you understand and invest for the long-term.
The basics of investing are shockingly simple. Ignoring them is like setting yourself up for failure. But if you still don't want to make that extra effort there are other ways to gain exposure to stocks. You can invest in stocks via mutual funds and let the fund managers manage your money.
’You only need financial knowledge to invest successfully in the stock markets.’
If that were true, financial advisors would probably be ruling the world. And not sitting behind desks guiding others.
Now I am not saying financial knowledge is not helpful or unnecessary even. As mentioned before, you certainly do require some basic knowledge before investing. But to assume that is all you need to succeed is wrong.
As you can be a financial expert and still fail miserably if you lack the right emotional quotient. Emotional quotient is simply the ability to understand and manage your emotions. It's important because it plays a HUGE role in the world of investing. It drives all our decisions, to buy, sell or hold a stock, often overriding all logic and reasoning.
Research over the last 20 years shows that bad investment decisions are often associated with emotions. A classic example is developing an emotional attachment to your holdings much like our old car. We don't want to give it up even it means losing a lot of money. This kind of irrational, emotional behaviour defines our investment portfolios and can be detrimental. Therefore, along with a basic knowledge of finance, you also require a high emotional quotient to invest successfully.
'I don't have the time to invest.' 'It's a very time-consuming process'
I'm afraid our financial news channels shoulder the blame for this as well. As they often show rows and rows of people glued to complex computer screens, crunching numbers, on their phones, cracking deals by the minute. Now that is a time-consuming process.
But know that these are a different kind of investors. I wouldn't even call them investors. They are traders, your typical stock market gamblers. The kind we mentioned before, looking to make a quick buck.
Now, if you aspire to become like them, surely you will have to allocate a large chunk of your time towards trading(i don't call it investing). That too, without any assurance that you will make money over the long-term.
You need not be an active investor to make money in stocks. All you need to do is spend some time picking the right stocks (without the complicated graphs and charts). And you don't even need too many. As Peter Lynch once said - 'You only need a few good stocks in your lifetime.'
Once you have identified those all you have to do is wait and review them periodically.
'You need a lot of money to start off investing in stocks'
Now, this cannot be further from the truth as there is no such prerequisite for investing in stocks. You can start with as little as 10 shares and build your portfolio over time.
You don't need to start with a truckload of savings. Most successful investors didn't have that either. They also build their strong portfolios over time by saving and investing small amounts, consistently.
Start small. Start early. You will be surprised how quickly small sums of money can add up over time with the power of compounding.