Wealth creation blunders I see

Human beings, especially the middle-class Indians whom I meet, love being called ‘middle-class’ - even when their net-worth reaches (and crosses) 1 Million US Dollars. By Indian standards that is real rich.

The reason for creating wealth is very simple - I met a person who retired at the age of 47 - compulsorily, and is likely to be in retirement for almost 50 years. (He is already 87 years old). When you have to fund such a long retirement, you need serious amount of money.)

What are the blunders that people make in the path to Wealth creation?

• Being overconfident about one’s ability to manage their own money: Even assuming that you have had some experience in picking the right mutual funds, or equity shares, and you have done reasonably well, it may be just luck!

• Taking Huge, big, concentrated bets! This Is true especially for those who have ESOPs in companies that are real, big and successful. So your ESOP in Infosys, TCS, HDFC ltd, HDFC Bank, etc. has created serious wealth. However, your ESOP in Satyam, Silverline, Yes Bank, would not have created any wealth at all. So taking concentrated bets - like promoters do - is not a great idea. In fact, it can be a big Retirement blunder. Putting a lot of money in equities - without understanding how to sit tight during a bear market is another huge, huge risk and again not sensible. 

• The completely different behaviour - of being ultra conservative - of keeping all the money in say bank fixed deposits, and LIC policies is also a big risk. Typically, such people think that they are taking no risk. They proudly tell their children (and those who are forced to listen) “we do not take any risk” - they do not understand the “Risk of not taking risk.”

• Starting too late - I would blame the family background, accidents in the early part of one’s investing life. Losing a few years of compounding is a serious blunder - and you will see this in any compounding table. The wealth created by Buffett has been an out come of starting at 11 and being alive at the age of 92 - see the impact of ‘n’. So start today. Procrastination is very, very expensive.

• Not having adequate Insurance - medical, term insurance for the bread-winner, burglary, - understanding transferable risk - and then managing that - is very important. I have seen families being destroyed paying hospital bills of say Rs 20,00,000. Taking adequate and appropriate insurance is a must!

• Not understanding the ‘impact’ of small numbers: Not understanding the ‘power’ of small numbers! Many people still say “what can I achieve investing Rs 10,000 a month”. This is just the mindset that “I should start investing when I have adequate money”. The same mindset also ‘helps’ in ignoring inflation! Not enough people understand the impact of inflation on their portfolio! Risks and Blunders  are easy to see only when others do it! When we make mistakes, we forget to pay heed to them!

PV subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C 40 a day’