Diwali is almost here. According to Wikipedia, the festival spiritually signifies the victory of light over darkness or good over evil, knowledge over ignorance, and hope over despair.
With the upcoming Diwali festive season, so comes the festival of lights, bonding, celebration and much more, but one must dwell on how we can correlate activities of this festival to our day-to-day finances and wealth management strategies. How can there be a Diwali without any shopping? New clothes, cars, mobiles, gold, and eateries. It sounds like fun, doesn’t it? But wait, how about we spend a small part of our Diwali bonuses on evenly appreciating assets? It is natural to spend hard-earned money on consumption related facets which give us a lot of happiness but ask yourself, is this a form of short-term happiness that can create long term financial difficulties? A balance of both is necessary. Every Diwali, gift yourself some appreciating assets as well so that in the long term every day will be Diwali. As Warren Buffet said, “If you buy things you don’t need, soon you will have to sell things you need.”
Let’s have a look at one of the most preferred investments that past Diwalis and Samvats have been of the Indian investor in gold and other precious metals
The darling of the Indian middle class, gold has a prestige symbol in our society. A person’s status is determined by the amount of gold on the body or in the locker of the house. It’s a thing which makes a big part of our social discussions about how much our neighbor has? How much was gifted in a marriage? All that glitters is gold or is it? Let’s dig a little deeper.
The price of 10 grams of gold in 1991 was Rs 3466. The price of 10 grams of gold in September 2016 was Rs 32,200. Almost 10 times more in 25 years or a 1000 percent gain. Wow! A dream investment! And one that people decide to make to ensure financial security. Investing in gold and then storing it in a precious metals IRA is the most popular choice and can help provide funds for people who may need it in the future, such as during their retirement. Companies similar to Lear Capital can help to diversify your investment portfolio to guarantee that you make as much money from your investments as possible. It’s what people can only dream of and it could be a better investment to make over stocks and bonds that fluctuate with the economy. However, it can’t do you any harm if you wanted to check out something like this Stash review to see how you can invest in the stock market when the timing is right. In most cases, this is why people decide to diversify their portfolio so they can get a better outcome. Or wait, is it too good to be true?
Let’s get familiar with a term known as compounding average growth rate (CAGR). A simple or absolute gain can make us all swell in shock but gold has in fact only grown 9.33 percent on a compounding basis. This return is without considering the tax to be paid on this gain, the transaction cost, the holding cost, etc. Gold has a more sentimental value rather than being an investor’s dream investment. A certain amount of gold for jewelry purposes or religious purposes is good. But what role does gold or precious metal play as an investment? Why is the return only 9.33 percent? Gold has no utility value of significance. It comes in use for store of value due to scarcity of supply. Gold doesn’t produce anything over a period of time but it is a dead investment that locks your capital and only plays on the fact that the supply scarcity premium will go up.
It makes way into an investor’s portfolio only as a hedge to risk-off events such as financial market crashes which forces global investors to move towards hard assets from financial assets. Ideally, gold should compose not more than five to 10 percent of an investment portfolio and only as a hedge. But unfortunately, for the Indian mindset, gold easily makes up over 50 percent of the gold portfolio which has given poor compounded growth.
This Samvat 2073 let’s take a different approach. Let’s gift ourselves the power of equity in the form of a Systematic Investment Plan of Equity Mutual fund. This entails us to buy equity every month as per the sum decided earlier by you. The same helps to accumulate it over a period of time and ride out the volatility of markets. Is it risky? Yes, it is exposed to market risk. But, let’s see the past performance on par with gold and let’s see where we have come up on that. Sensex as on March 31, 1991 was Rs1168while as on March 31, 2016 was at Rs28,372. Over 25 years, this compounding is 13.61 percent. Wait, let’s not forget that the average dividend yield every year was two percent. Let’s also not forget the fact that all this return is tax-free. Let’s also not forget the fact that many mutual funds in the past have even beaten their benchmarks to give higher returns. Between these 25 Diwali celebrations, the Kargil War, Global wars, multiple stock market scams, economic crisis on a global and domestic level, every factor has played out and yet these returns have come. For the optimist, the best of India’s growth story is yet to come ahead.
This Samvat 2073, let’s clean up our traditional mindset and go towards the long term power of compounding to help create more wealth and let Goddess Lakshmi shower fortune and wealth on us all.
- Lifecycle planning - October 20, 2016
- Is gold the smartest way to invest this Diwali? Or should it be a mutual fund/SIP? - October 13, 2016
- Fixed about Fixed Deposits? - October 6, 2016
