A reader wants to know a way to convince his friend to start investing in equity —a discussion.
To not invest in equity is a choice. Whether that is an informed choice or not is another matter. Friend or relative, I don’t think we should try and convince anyone too set in their ways to change it to something we feel is correct. Who knows, someone not investing in equity might end up wealthier or manage to find enough money for their long-term goals.
When I started investing in 2007/8, I knew no one around me with any capital market experience. This is how I convinced myself to invest. It may not appeal to everyone. If it makes someone like your friend think (assuming he/she takes your suggestion to read this seriously), it will make me fleetingly happy. Beyond that, to each their own.
Let us go back in time to the year 1990. A cup of tea at a roadside shop would have cost about Rs. 0.5. Fast forward 33 years, and in 2023, we will have to shell out Rs. 12-15 for the same cuppa.
The annualized inflation rate over 33 years is about 11%. Now suppose you had Rs. 1 with you in 1990. You use half of that to buy a cup of tea and invest the other half.
After 33 years, you withdraw the money, pay the necessary tax and use the rest to buy a cup of tea. Unless you have Rs. 12-15 with you cannot. And if you cannot, inflation has degraded your purchasing capacity.
Naturally, if you had other sources of income, you would not bother much as you can source funds from elsewhere, but what happens after retirement? That is when the impact of inflation is most painfully felt.
Now suppose you have Rs. 30 in 2023. You spend half of it to drink a cup of tea and invest the rest. If you wish to drink a cuppa after 20 years, your investment should have grown to Rs. 121 (assuming the same 11% annualized increase) after tax.
This means a post-tax return of 11%. Suppose you want to invest in something safe, like an FD that offers 6% after tax. Then unless you invest Rs. 38 (more than double the current cost of roadside tea), you cannot buy the same after 20 years.
The true cost of seeking safe returns is the higher investment necessary to offset inflation. Very few can afford to invest the extra money. Therefore, investing in market-linked instruments is the only way to increase portfolio return and combat inflation.
Historically, although there are no guaranteed returns, equity has more often than not beat inflation: Why should I invest in equity mutual funds when there is no guarantee of returns? Also, see: Equity may beat inflation, but that doesn’t mean you will!
Thankfully not all our expenses increase at 11%. The average inflation of all our expenses has come down over time. Currently, an inflation estimate of 7% is reasonable.
This does not mean the overall return needed to keep pace with inflation is just 7%. First, fixed-income instrument returns go down with time as our economy develops (along with inflation). Second, there are taxes to consider. This would mean the net return with fixed income will almost always be lower than inflation. So using fixed income alone is quite risky as it would guarantee that our purchasing power is lower than necessary.
We need a good amount of equity in our portfolios, and the best time to include this is when young. When our goals are decades away, the risk associated with equity investing becomes reasonable and eminently manageable. We recommend an initial asset allocation of 50% equity and 50% fixed income.
This is a video on the topic from our YouTube channel.
Do share this article with your friends using the buttons below.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Podcast: Let’s Get RICH With PATTU! Every single Indian CAN grow their wealth!
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it’s content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)