Why being a diligent saver may be making you a bad investor

“Saving is a great habit, but without investing and tracking, it just sleeps” – Manoj Arora

In general, we are aggressive savers and “keeping something aside for a rainy day” comes to us more naturally than most (probably because we live in a country that is used to quite a bit of excess rain! 😊). We are people who save because we are taught to save. For most of us, our earlier generation (or the one before that) has gone through tough times bringing their children up and we have seen it. We have lived through times of “scarcity” and this scarcity has automatically built into us the values of both prudence (living within our means) and caution (hesitation to take the risk).

This prudence has held us in good stead and manifests itself in our lives in many ways. Not only do we usually have Plan Bs (ie. jugaads) ready for most important situations (ab kya karein is not something we get stuck at usually), it has also taught us to have a savings habit and spend carefully. Our ability to survive and manage short-term household cash crises is also quite good, purely because there is some savings lying somewhere that turns up to be used in that emergency.

At the same time, this caution has led us to being not-so-good investors. For most of us, our investing experiences are formed by what people around us have done. Hence the moment one has a secure job, “ghar kareedna hai” becomes the goal. For our earlier generation, investing a large part of their savings in gold was common since “bachchon ki shaadi mein dena hai”.

The values of caution have also been built into us because of past experiences that we may have had or seen. Someone in the family losing all their money because “usne share-market mein gawah diya” can be a very tough experience for a young adult and can form the basis for his or her life-long investing thinking process.

As financial planners, we commonly see large parts of client savings parked in illiquid assets such as gold or real estate. Most clients we get usually have significant holdings in these asset classes, to the extent of being too dependent on the performance of these asset classes to secure their financial futures. What such strategies also end up risking is that while we spend our lives building “assets”, we don’t necessarily have enough wealth when the time comes, and corrective actions in such situations, unless taken in time, also can prove costly.

It is only recently that people are getting more comfortable with financial assets such as mutual funds, and stocks. Even today, personal finance and investing isn’t taught to kids right from school to graduate programs. It is ironical sometimes to see senior professionals, directors and vice-presidents in large companies, managing company balance-sheets and P&Ls, but struggling at home to have a clear plan that will help them secure their long-term goals.

The fundamental issue with not knowing the basics of investing means 2 things. One, you are dependent on the mercies of whichever “salesperson” you meet (whether from a bank/NBFC, a newspaper ad or a well-wisher friend/relative) to take your investing decisions. Two, even more importantly, you are dependent on the vagaries of luck and time to determine whether you have made the right choice or not.

So, what can we do about it? While Saving is about controlling your expenses to keep aside something for the future, Investing is about making sure it is enough when the time comes. This requires the layman to have some rudimentary knowledge about various financial assets, the return they can generate as well as the risks they entail over various time horizons. Importantly, it also requires us to recognize the corrosive power of inflation on our savings and the ability to assess which investments can build wealth over the long term and which erode it.

Investing is primarily about understanding risk and putting your money to work when and where it favours you. It is not something alien to us since we generally take risks in other domains all the time. In today’s times, we cannot remain ignorant about the basics of investing especially when it does seem that the future of wealth creation lies more in financial assets like equity, mutual funds and bonds, rather than conventional old-time favourites such as real estate and gold. Start your learning and investing journey today. If required, reach out to a good financial planner, just make sure that their interests are aligned to yours.

Finwise is a personal finance solutions firm that helps individuals and families plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Image credit: Mohamed Hassan, Pixabay.com

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