Wealth Creation Can Be Boring

We all want to create wealth and there is nothing wrong with the desire. However, many of us want it to happen quickly which may be a cause of concern. The fact is that wealth creation in a planned manner can be very boring. The temptation to indulge in attempts to make fast money through speculation is on the rise. The tendency gets stronger due to easy availability of avenues and enabling technologies. Attempts to inject unwanted thrill in the wealth creation process may end up causing more harm to the long-term objectives.

Saving for Wealth Creation

The first and foremost pre-requisite to create wealth through investment is to save enough. It is the savings in hand after catering for immediate expenses which can be invested in growth opportunities. Over the long term it is not your earnings, but your savings which will influence the Net Worth. Some one who earns more may end up poorer than someone who earned less but saved more.  Budgeting is an important tool to plan the expenses and improve savings. One should get into the habit of Paying Yourself First.

Planning for Wealth Creation

The next important aspect is a proper financial plan. The entire effort should have a guided direction which is possible through detailed financial planning. We must assess and forecast the requirements over time and define them as Financial Objectives. The exercise remains dynamic with evolving life events like marriage, child birth and retirement etc. The lifestyle must be calibrated as suggested and guided by the plan. A well-considered financial plan will give us the purpose to save, and the necessary guidance towards appropriate investment options.

Simple and Assured Strategy for Wealth Creation

A sound strategy is necessary to channelize available resources towards attainment of intended objectives. The established strategy for wealth creation through investment is simple and credible. It involves defining an appropriate Asset Mix which can be changed as per life cycle. Thereafter having a portfolio with diversified investments and carrying out regular rebalancing.

Asset Mix

Broadly speaking, asset mix involves deciding on the proportionate distribution of available savings to Cash holdings, Debt instruments, Equity investments and other assets like Property and Gold etc. All these asset classes exhibit different growth and volatility. A decline in one asset class at any given time is generally compensated by appreciation in another. Personal aptitude and choices have a great influence in the formulation of Asset Mix, and many people stick to only those asset classes which they are familiar with. It is important to enhance your knowledge base and awareness of all asset classes so that you can feel confident of including them in our Asset Mix.

Diversification

Diversification is a well-established method to minimise risks associated with specific investments. It needs to be done at all levels and within each asset class / sub class. The law of diminishing returns is active here also and therefore over-diversification should be avoided. For eg having 05 stocks in the equity portfolio will give little diversification. The risk decreases significantly when it is increased from 05 to 20. A further increase to 50 may have only a marginal effect, and beyond that there may not be any further benefit.

Rebalancing

As all asset classes work in varying cycles of performance, there is a need to carry out regular rebalancing. This involves achieving the pre-defined/reviewed asset mix by moving funds from surplus asset classes to those which have gone below the desired proportion. This should be done at least once every year.

Why is Wealth Creation Boring ?

We all are familiar with the Power of Compounding. It takes time before the results are very visible. Letting money work on its own and not doing something with it very frequently might be very boring. Creating a sound equity portfolio and not tinkering with it when their prices are fluctuating daily might sound boring. Not being able to discuss the daily developments and exploits with peers may be boring. Doing lot of planning and taking fewer decisions in a year can be boring as compared to multiple decisions during a single trading session. Not being part of the crowd can be boring.

One might get a feeling that he/she is not doing enough towards wealth creation as the effects are not visible in the short term. Patiently waiting for the Long-term pay offs of simple investment decisions can be very boring. Spending time and energy to enhance own knowledge base and skills can be tedious and boring. But all these evidently boring actions (or restraints) are essential for assured wealth creation.

The Distractions to Avoid

Despite a good understanding of the fundamental strategy, there are several distractions which make us drift from the correct path.

Exploits of Others

There will always be someone at workplace, or amongst friends/relatives who would be boasting of his intuitive trades and impressive short-term gains. This gives us a feeling as if we are missing out on something. What we fail to realise is that no one talks about their bad decisions. Someone who has made gains recently, actually might be sitting over lot of losses incurred in the past.

Ease of Indulgence

The impressive evolution of financial technology has brought all procedures on the palm. The ease of indulgence with few clicks on our mobiles tempts us to engage in frequent speculation. This ease clubbed with the feeling of missing out (FOMO) is a combination of concern.

Persuasion by Agents and Brokers and Advisors

While every investment decision carries a possibility of return along with downside risk, it certainly benefits the Agent/Broker. It is for this reason that they will constantly pester and motivate you to indulge in frequent investment activities. There are multiple sources from where one keeps getting free advice on where to invest money to become rich. If there was ever some assured formula of this sort, the advisor would have invested his own money and made a windfall. It is always easy to tell someone else, where he/she should put his/her money.

Lure of High Returns

There may be offers of higher returns on products that we are unfamiliar with. At times it may be a friend or family member who may introduce such products to us. All Ponzi Schemes promise high returns and they also reward the initial subscribers to gain credibility. Once they have a large subscription base, they just vanish with all the subscription money. It is important to invest in only standard instruments through regulated platforms in well identified asset classes.  

Over Confidence

There may be some stray chances of luck where our intuitions pay off well. This may boost our confidence and mislead us in believing that we can be right again. Once into losses, our ego might prevent us from exiting till we have made up and the cycle is never ending. It is better to rely on confidence based on knowledge rather than speculation driven random success.

Recommendations

• Don’t try to hasten the Wealth Creation Process. Speed may give thrill, but cause damage to long term growth prospects.

• Stick to the basic strategy of having an appropriate asset mix with adequate diversification and carry out regular rebalancing.

• Beware of the omni-present distractions and don’t fall for the temptations.

• Don’t chase short-term gains. Accept that the credible and correct path to wealth creation can be boring.
  
  

Suggested Readings

Asset Diversification- The Key to Balancing Risk and Return

Pay Yourself First- Save before you Spend

Want to Create Wealth- How Much and by When

Understand Your “Why?” of Investment before deciding on the “Where?”

The Power of compounding- Is it working for you !