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Starting early gives you a confident finish!

by Money Puzzle   ·  April 1, 2019   ·  

Starting early gives you a confident finish!

by Money Puzzle   ·  April 1, 2019   ·  

What happens if you don’t finish as you expected to? It took me three mins longer to complete the Tata Mumbai Half Marathon this year than my what I managed in 2018. In my mind I was quite sure that I would be able to shave off at least 10 minutes compared to my last year’s time. Why? I had had a good running year, felt like I was stronger and more stable in my running. Plus, last year I ran with a small injury, hence, I was certain I would do better this year. But it wasn’t to be.

When we invest or build our portfolio, often it’s with a return outcome in mind – a target return. What happens 5 or 10 years later, closer to your financial objective, when you realise that the target return hasn’t been achieved? Can it happen? All this planning and discipline and still you don’t reach your target return?

The return you expect depends not only on your planning and investment discipline, but also on a number of other external factors which have a bearing at the time. I was not alone in my dismay at the end of the half marathon this year, many other runners too suffered the same fate. Strong, disciplined runners ran into difficulties. Why? Some say, the weather turned suddenly on the day of run, it was warmer and more humid which affected the expected performance. Others attribute it to the sheer crowd that one has to run through to reach the finish line. Running alongside some 40,000 others is no joke.

Whatever the reason, seemingly it was beyond control for many runners. Long term investing is a bit like that. You plan for an outcome but sometimes, closer to the date of redemption market movement may be too sharp, resulting in either higher or lower than expected gains. If it’s the former, there are no complaints, but in case of the latter it can become worrisome.

Start early and be regular, it will help you build a strong foundation over the years as you reach closer to your financial goal.

How can you mitigate this risk of volatile return? One of the simplest ways to do that is starting as early as possible. If you start investing 5 years before your return goal, the deviation or difference from your expected return can be high, depending on the external market environment. Extend that period to ten years, the chances of deviation begin to fall. Analysis of historical returns from Sensex data, shows that the chances of negative returns are 7% after 7 years of being invested in equity and 2% after 10 years. In fact, if you remain invested for at least 10 years there is an 80% chance of 10% plus return and 55% chance of a return higher than 12%. Take this up to 20 years and chance of a return less than 10% annualised is down to 9%. Remember here we are talking about returns from a market index, a well-managed fund returns can be even higher. The earlier you start the smoother will be your return experience at the end.

Now this experience applies to equity investing, which is market linked and faces several external impacts in the short run. But why take this risk at all? Because you want to create wealth in the long run and not just earn a fixed return through products like bank deposits, which many a times don’t even match up with the annual inflation.

I have been running regularly for about three years. I still have many years of practice ahead to better my running techniques and reach a level I am fully satisfied with. Nevertheless, the regular running means that even on a bad day I am not too far from the mark and the post run recovery is rather quick. Hopefully as I spend more time trying to better my technique, I will be able to build incremental speed and endurance to help me finish better than my target.

And just like that, when it comes to your investments – start early and be regular, it will help you build a strong foundation over the years as you reach closer to your financial goal.

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