You have no choice but to get into Stocks

  

Whether to seriously get into stocks or not - is a very debatable topic, not only with the Indian middle class mindset but also with investors across the globe.

Myths about Stock Market

Traditionally stocks have been associated with huge risks, losses, bankruptcy and many more negative aspects. Rarely, have we heard of stories where someone has consistently made good positive returns from the stock market, beating those from the traditional

instruments, be it Mutual Funds, Fixed Deposits, Insurance, ULIPs. Someone like Warren Buffet seems more like a phenomenon rather than a common occurrence. Yes, the successful stories are heard less often in the stock market arena because most people consider stocks to be a quick rich scheme where one can buy on lows and sell on highs and make money within a few weeks, if not days. If you think, act or consider stocks like most people do (a quick money making machine) and think that you can earn money without making enough efforts or acquiring enough skills,then you are a part of the crowd - who will surely not succeed, at least in the long run.

You actually have no choice

I am here to tell you that investing in stocks is much more a science rather than luck. You not only need to learn, study, understand and get into it but you also need to understand as to why is it really important or necessary to invest in stocks given the fact that there are so many equity related investment options available today.

The reason for this post is to tackle with the last point. Why should you invest in stocks? In fact, i should re-word this statement as :"Why you have no choice but to get into stocks ?" - yes, this question makes much more sense. Actually, you have no choice. You need to get serious about investing in stocks. Lot of my friends do invest in stocks - but more for the sake of it or give themselves and their colleagues a false sense of belief that "Yes, they have invested in stocks". Somewhere at the bottom of their heart, they are still afraid of stocks and hence do not want to to invest the portion of their portfolio money that is required to be invested.

Investment Options

Let us look at what investment options are available to all of us and whether they are suitable enough for anyone to grow rich or to get financially free. Forget about growing rich or financially free, we would just analyze whether these options are suitable enough just to maintain your current standard of living.

1. Savings Account - Most countries pay less than 1 to 2% interest on the money kept in savings account. In India, most banks pay 4% while some banks pay a max of 6%. Even if you assume that you can get a consistent 6% rate of interest from your savings account, it is nowhere near to the current rate of inflation of 8-9% in India. This essentially means that you would continue to lose your buying power from the money that is kept in a savings account. This would ultimately lead to the money depreciating to such an extent that it will become worthless to hold that money, thanks to the inflation monster

2. Fixed Deposits / Recurring Deposits - The max that i have heard in the recent months of a Fixed / Recurring Deposit providing returns in India is around 10%. Let us assume that you are able to ride on this 10% returns deposit every single time. Here comes the tax dracula. Unfortunately, you will have to lose around 30% of this earned interest to the taxes, which ultimately yields an in-hand return of 6-7% only after tax deduction. This is similar to what savings account gives you and can never match the inflation figures. Again, this option is ruled because you would continue to lose the value of money with time.

3. ULIPs / Insurance Plans / Mutual Funds - This option has gained ground over the last decade or so, and seems to have attracted a lot of customers, probably because we understand that we can get high returns from stock market and that too also, without taking much risks. To some extent, this may be true. But remember that all such insurance and market linked products have their own hidden fees structure. and why not ? They are deploying highly experienced professionals to invest the money in stocks, and who will pay those professionals ? Ofcourse, we have to pay. More than this expenses ratio, there are entry and exit loads which not only make such investments inefficient, but all the returns are taxable as well.

4. PPF / Post Office Schemes / Employee PF / Other Govt savings - These are some of the options where you are likely to get close to 9% tax free returns. These are good options but remember they have huge lock in periods - minimum being 5 years. Also, these options will keep you just abreast to the inflation rate running currently. In fact, as a common man, one should consider inflation in specific areas like health, education, food etc...- all these inflation rates are running well above 12-15%. If that is the case, even these investments are not going to be of much use in the long run.

5. Real Estate - This is the only investment (other than stocks) that has the "potential" to give you returns higher than 15% an an annual basis and also do so fairly consistently (at least in developing countries like India). I know that some of my US and European colleagues would be surprised to see these numbers, but that stays a fact. There are a couple of drawbacks associated with such investments though. The first major drawback with this investment type is that it needs a "big initial investment", and the second issue is that the investment is not so easy to get liquified when in need. So, one must definitely go in for Real Estate investment options, but one must do it only after one has attained financial freedom. At that time, you will have the money to invest, time to study on the best available option, plus you would not be too bothered about immediate liquidity.

Why Stocks?

This is the "only" investment option which has the "potential" to give you return in access of 15% (so that you can beat inflation and taxes), has immediate liquidity, and can be started with a bare minimum amount of money - even with what you have in your wallet right now. There is no other, yes absolutely no other investment option that has the potential to give you all 3 things in one go - high returns, min investment and fast liquidity. In fact, once you understand the fundamentals of stocks and stock related investments, you can even aim for consistent 30-40% annual returns over longer periods (say more than 5 years or so).

If you want to give yourself even an iota of a chance to get rich and wealthy in life, you have actually no choice but to get into stocks. The earlier we all realize this fact, the better chance we have to become seriously wealthy. Do not be afraid of it because of the stories you may have heard. Learn it, read about it, start slowly, do not get dissuaded by frequent market fluctuations, stay focused, give it 4-5 years of learning by practicing, slowly keep increasing the investments and you will not only start enjoying it but will also be able to make some serious money.

The book "From Rat Race to Financial Freedom" will teach you the fundamentals of stocks. It does not get into technical depths of specific stocks but definitely teaches you enough to get started on this most important and the "only viable" option to get rich.

Cheers

Manoj Arora