Every successful investor who has ever been able to create exponential wealth has benefited from the markets we are witnessing in current times. Bear markets, barring the Great Depression, typically last anywhere between 2 and 6 months. But most investor wealth gets annihilated because they book losses and don’t have the gumption to get back in the market.
So, how can an investor steel his frame of mind? How can one leave equity worries behind? How can YOU, as an investor, create a wealth legacy that extends beyond your lifetime?
Legacies Are Not Created Overnight; They Are Built Over a Lifetime
A single generation that does it right helps three generations. Simply put, what we create today is what we leave behind as a legacy for three generations to come. If you want to build 10x wealth to leave behind a legacy, you must follow 5 rules. But before we get to that, here are some learnings.
After hours of crunching data and numbers, I have found that life is net positive, only above 9%. Simply put, if you invest in assets at 9% for 40 years, all you are doing is getting your income back.
Now let’s assume that if you were to grow your wealth at 5% (savings growth), for the first ten years, you are saving only 10% each year. If, at the end of the year, you increase that by 5% and it keeps growing by 5%, you arrive at 6x of your total lifetime income.
It is important to remember that at 9%, you only get your income back. It means you have earned Rs 10 crore, paid for all expenses, championed inflation, etc., and earned Rs 10 crore at 63.
But the wealth creation journey starts beyond 9%. Your base assumption is that your investment starts over 9% return on your net worth levels. But what if you could make your income grow by 10x at 20% in 40 years? Can you?
Only 1/10 investors achieve this.
The only way to do it is to be a professional investor or get a professional advisor to do it for you. Get an expert dedicated to making wealth for you 24×7 and tracking it relentlessly. This is not a job you can do by yourself. To understand this, let’s look at various asset classes from a 5-year to a 20-year period.
Why Investing in Equities Needs a Keen Eye?
Let’s glance at the report card of major asset classes.
Equities have given us a CAGR of 11% in 5 years, 17% in 10 years, 13.6% in 15 years and 12.9% in 20 years. On the other hand, gold gave a high of 12.9% in 10 years but is at 8.4% in 20 years. Bank FDs have given an average of 5.2%. Property boomed 13.4% in 10 years but, in my opinion, will drop from 6.4% to a further drop of 3.4% going forward. Consider the average inflation in the same year period — 6.3%. In all this, only Indian indices have grown 17% in the last 10 years!
The market is showing resilience in rebounding, as you would have seen in S&P and Nasdaq. Furthermore, the Indian market is poised for rapid-fire growth over the next five years. As markets open and inflation gets into reverse mode, you will see a vast revival around October 2022. So, we may end this calendar year in a more prominent green than red.
But over 80% of investors lose money because of a lack of advisory. For instance, we manage Rs 41,000 cr on MarketsMojo (personal portfolios), and over 90% of investors underperform, yet do not apply timely, expert advice. According to an ISB study, investors experience losses due to the disposition effect, overconfidence, and lack of professional help. Across the globe, investors have a mental disposition that they can do it themselves, and they play with that gamble throughout their lifetime.
So, the only way to get over investor biases is to seek the advice of an expert.
Equity is the only asset class which has never gone to zero! Of course, bonds can go to zero, and banks can default, but equity is the only asset class that has never gone to zero and has always rebounded with an average bounce back of 4-5 months. So, despite knowing that equity will always recover, and the market will correct, why do investors fear?
I believe investors live in various kinds of illusions that can only be broken with the help of an expert advisor. They are:
- Dabbling in stocks rather than a well-managed portfolio
- Illusion on what is affecting the stock price
- Buying the price and not the value
- Keep buying and holding
- Saving more than earning more
- Exiting when down and entering
- Passion for falling knives
- Booking losses
Seek Expert Guidance
You may be able to win the short-term battle of making money but not the “40-year” war of beating 9%. If you are hesitant about seeking a financial expert, invest in the index, which will at least give you 13% returns. Having an expert changes the mental disposition of panicking over market volatility, becoming indifferent to your emotions about how the market behaves and not relenting to herd mentality.
Take the game of snakes and ladders. If you’re familiar with it, how many times has a snake bitten you? How many times did you get only ladders and finish the game even when you came last? Nothing else matters other than that completing the game, whether you are first or last. Therefore, it is crucial to stay in the equity game. It is not about coming first or last, but about finishing, and when.
Let me take two investors here as examples. First, there’s Jim Simons, who runs Hedge Fund Renaissance Technologies with a net worth of $23bn and a CAGR of 66% since 1988. Then there’s Warren Buffett, who’s done a CAGR of 22% since 1950 and is worth $81bn.
Jim Simons is the better manager, stock-picker, and market reader. But who is winning the market or has won the game? It’s Warren Buffett, hands down! For the simple reason about the time, he has been in the market.
Why Does Time in the Market Matter?
Let’s assume Warren Buffett, who began investing when he was 15 years old, decided to stop at 60. Do you know how much wealth he would have had by age 60? Approximately $11.9mn or Rs. 100 cr. But his net worth today is $81bn or Rs. 6,48,000 cr. If he had retired at 60, his net worth would have been 0.001% of what he is worth today or 99.9% less than his actual net worth.
Age has nothing to do with asset allocation or growing your money. The journey must continue when it comes to investing in equities. Equity investment is a mindset and not an age issue.
A great example of how to do upward averaging and who has gone more wrong than right is Mr. Rakesh Jhunjhunwala. He bets big on stocks when he goes right with them. When he goes wrong, he gets brutal in cutting down losses. As an expert in booking losses and upward averaging, his secret lies in a concentrated portfolio of 5-6 stocks and his bullish belief in the Indian market. And so are we at MarketsMojo. To be bullish in bullish times is anyone’s game. To be bullish during bearish times is the key.
The world is going to be moving in 2 directions:
- Active managed diversified funds to passive index investing
- Concentrated high returns strategies for matured long-term investors
And sooner or later, concentrated portfolios will win the game. That’s why having the best advisor to manage your portfolio is critical if you are looking at your money growing in a 40-year cycle.
The 5 Rules You Need to Build 10x Wealth
To sum up, these are the five rules you need to remember when building a legacy or creating 10x wealth.
- Life is net positive, only above 9%.
- Only 1/10 investors achieve their desired goals – seek an expert.
- Be a life expert in the snakes and ladders game.
- Technology will be the most significant advantage and disadvantage – choose wisely.
- If you can’t see it, it does not mean it’s not reality.
Do remember, you have only two essential jobs in life –
- Earning & Saving.
- Investing.
Take your second job seriously, as it is the only multiplier you will ever have.
(By Dr. Mohit Batra, Founder and CEO, MarketsMojo)
Disclaimer: This is the personal view of the author. Readers are advised to consult their financial planner before making any investment.