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Find out your IQ - Investment Quotient

Published on Thu, Nov 23, 2006 at 11:24 | Source : Moneycontrol.com

Updated at Fri, Nov 24, 2006 at 11:41

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What is stock market, is it speculation den or place to invest and create wealth? Answer to this lies in how we deal with it. If we consider stock market as place to make fast/quick money, it is speculation den. When equities rise most of us feel that to make money we should follow "high risk, high return" strategy. In reality we are following "high return, high risk" strategy. If we push our mind we will find subtle but important difference. (Also read - Is Risk eating into your portfolio?)

Does high-risk mean high return?

If we are feeling that by taking high risk we will "necessarily" get high return, we are kidding ourselves. Word risk means probability of loosing money. High risk means high probability of loosing money. Therefore if you are willing to accept high probability of loosing money, you 'may' get high returns.

In long run - over a period of 7/9 years - equity markets are place to get high return with low risk. On the other hand any kind of speculation is high risk, low (no) return game.

Are you a speculator?

Another litmus test to find out whether we are considering stock market as speculation den or place to create wealth is the way we get anxious about our investments. If our investment horizon is more than 7/9 years away, we will not panic even if equity market falls for 7 months. On the other hand if we are speculating, 7 bad days/weeks will give us anxieties. If 7 days/weeks fall give us anxiety, we are in speculation mode. (Also read - Learn to invest in equities with 'no capital risk')

Lastly, if we start asking anyone who even remotely uses letter "s" of stock market, his/her views on near term movement of equity market, we are in speculating mode. We want to inquire about the near term movement because - irrespective of what we say - we have purchased equity for short term. This is giving anxiety and we want someone - whom we want to consider as an expert - give us assurance. The way no one can predict the outcome of speculation, in near term no one can predict movement of equities.

Reason to discuss above behavior is because as human beings, we are intelligent breed and we do not allow ourselves to admit we are speculators. Therefore it is important to consider above and verify whether we are considering stock market speculation den or place to create wealth. (Also read - Plan your retirement in 3 simple steps)

How to earn high returns?

Rome was not built in a day. No matter how hard we try, we will not be able to create wealth quickly. It will take decades before "stable" wealth is created.

Invest in equities if your financial goals are more than 7/9 years away. You may either invest directly into equity markets, if you have the skill and time. Alternatively consider equity mutual funds. In last couple of years we have got equity mutual funds with varied investment philosophies e.g. index funds, large cap funds, mid-small cap funds and contrarian funds. Soon we will have global equity funds. Mutual funds allow ease of operation, diversification, professional approach etc. You can invest in these funds either lump sum or you may also consider investing in a systematic way over a period of time. (Also read - 10 myths about Systematic Investment Plans)

- Gaurav Mashruwala

The author is a Certified Financial Planner. He may be reached at gmashruwala@gmail.com

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