6 Top Wealth Creation Myths Every Young Investor Should Know
All of us want financial security, a decent lifestyle and ultimately, financial freedom. However, we quickly lose sight of this goal in our hectic schedule. Plus, our parents and elders’ conditioning and wrong knowledge develop certain wrong notions and myths in us. These myths can sabotage our wealth creation goals in the long term. This article explains some top myths on wealth creation so that you can steer clear of them and move forward confidently towards your financial dreams.
Myth #1: I don’t have enough money to invest: Most investors waste their precious early years of their earning journey procrastinating and thinking that they do not have enough money to invest. The deeper reason underlying this myth is that they think they need a considerable amount for investment purposes. This is far from the truth. You can start small by investing as little as INR 1000 a month. The important thing is to start early and stay longer in the market. This helps you to reap the power of compounding. Another way to look at it is that you have little or no financial responsibilities when you are young. That is the right time to kickstart your investment journey.
Myth #2: I earn well, and that is enough to create wealth: Earning well is no indication or assurance that you will be able to achieve your financial goals. Earning money is just the first step. Think of it as a raw material. You have to process the raw material (investing in the right avenues as per proper asset allocation, periodic re-balancing etc.) to make a finished product (achieving your goals). Suppose you do not save and invest that amount in the right avenues per a set investment plan. In that case, you will be tempted to splurge and can quickly lose your way in your financial journey.
Myth #3: I should focus on returns while investing: This is widespread mistake investors make while investing. They try to choose investment products that give the highest return while completely ignoring the inherent risk in the product and whether it is suited for their financial profile or not. This myopic return-oriented mindset makes people take short term bets in high-risk products like equity. They do it without a clear understanding of product structure and the risk involved. Result: They lose money and, more importantly, their faith in these wealth-creating avenues. It also makes people lose money in financial scams that promise supernormal returns in a short time. A wiser approach is that you should decide on your financial goal before investing even a single rupee. That goal will clarify the time horizon and help you zero in on the right product. For example, if you are looking to save for a home loan down-payment 3 years away, you can invest that money in fixed deposits or liquid funds. You can then choose to evaluate individual products on risk and return parameters within these broad product categories and arrive at the right product.
Myth #4: Investing in traditional investment avenues will see me through: Parents and grandparents have a strong influence on children in all aspects of their life. Unfortunately, that influence pressurises the children to make the same old savings and investment choices that parents made in their time. The problem with this approach is that the choices made a few decades back may not be relevant now. Inflation in present times is so high that traditional investment products like provident fund, fixed deposits and endowment type products barely match the inflation rate. Result: A zero or negative “real” growth of your portfolio. Instead, build knowledge of equity as an asset class and design an optimal allocation of low-risk and high-risk assets in your investment plan.
Myth #5: I need to select the right product before I can start to invest: Searching for the perfect investment product amongst so many available investment options can lead to a “choice paralysis”. As a result, you can find your money sitting in your bank account for months and sometimes years, earning low interest. Real wealth creation does not happen by selecting the most perfect product. It basically comes by having the fundamentals right: starting early, investing as much for as long as possible, following a set asset allocation etc. Shut off the media and experts. Start somewhere, even though it’s not the best. You will always have an opportunity to move to a better product as you go further along the way. At the same time, commit yourself to a personal finance reading schedule. This knowledge will help you make the required course corrections as needed.
Myth #6: I need to consider the timing of my equity investment: Another big myth that keeps investors from making money from equity markets is to fall for the media noise and trying to time the market. As a result of this wrong mentality, you can waste a lot of time being out of the market searching for that perfect market level to invest in. Understand this – Markets are irrational, and they will be like that. Our job as investors is to invest regular amounts consistently from a long-term perspective. Over the long term, you can expect the growth of your portfolio will be in line with the growth rates of the companies you invest in.
Conclusion As they say, the best way to reach the goal is to stay clear of the many pitfalls that come in the way. These myths are like those pitfalls that keep you stuck financially and don’t let you move forward. Awareness of these myths and building the proper knowledge of personal finance can help you bust these myths and effortlessly achieve your financial goals.
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