Getting rich or building wealth? At Banyan Tree, we make a distinction between getting ‘rich’, and ‘building wealth’. The first is a relative term, and dependent on how much money your peers have. The second is an objective goal, based on how much capital you would like to possess at a certain point in the future, and can be achieved if properly planned and executed. If you could like to estimate how much wealth you should build, you will find this article helpful – ‘How much is enough’.
How much wealth you will build depends on your income, expenditure, and how well your investments perform. We are here to help you with the last objective – ensuring that your savings become sound, wise investments that will help you become wealthy.
The most important factor when choosing your investments is capital protection. Research your investments well, and keep a margin of safety when you make these investments so that your investment does not face deep drawdowns when markets go south. If you have invested in the past in equities, take some time and study the performance of your investments. You will notice that the investments that have had the maximum impact on your portfolio are the ones whose value have fallen the most.
Which asset class should you choose? Should you invest in real estate, bonds or gold, traditionally considered good investments, or should you invest in equity? Historically, equities and real estate have been the only asset classes which have beaten inflation by any margin over extremely long periods of time. The performance of equities in India can be best gauged by the value of the Sensex which has a base year of 1978-79 when its value was 100. Even at the depth of the crisis in March 2009 when the Sensex was 8000, it was up 80x over the preceding 30 years, a compounded return of about 16%. Unfortunately, there is not much long tail data about real estate prices in India. Anecdotally, a few questions posed to our parents reveals that real estate has delivered a reasonably good 12-16 % p.a. at current valuations. The real estate market in the US for which 100 year data is available has not done as well and has just about beaten inflation over 100 years. As a matter of fact (see the Case Shiller 100 year chart) real estate in the US gave 0% inflation adjusted returns from 1890 to 2000, and then spiked suddenly to astronomical levels. We know how that ended!
The value of the Sensex quoted above suggests that there is a large factor at play when it comes to investing over long periods of time – the power of compounding. This Power Of Compounding spreadsheet illustrates how your investment would grow when invested for a 20 year period assuming different rates of return.
Clearly, wise investments in equities are probably your best bet for reaching your financial goals. To read about how Banyan Tree Advisors can help you make the right equity investments, read about how we invest your money.