Very often I hear the statement that one must stay invested in shares or debentures or mutual funds or ULIPs for a long time in order to really earn a high rate of return. The argument usually put forth is the SENSEX was 100 in 1979 and is now around 40000, which in effect means that had you invested in a SENSEX fund Rs. 100 in 1979, your money would be worth Rs. 40,000 today. There cannot be a more fraudulent statement than that in finance. But first let me tell you my personal story.

Why high risk is not for the long term

I had in the mid-1990s purchased the Triple Option Convertible Debentures of Reliance Petroleum. Subsequently the company became a part of Reliance Industries. On Mr. Dhirubhai’s demise Reliance Industries was divided by his two sons. The Rs. 6,500 I had invested in the mid-1990s was not worth even that much till 2010. Remember I had shares in Reliance Industries, which at that time contributed to about 60 to 80 % of all trades on the stock exchange. By any yardstick of financial advisory principles, those in financial advisory services would have told you that the investment is safe. Park your retirement funds, would have been their advice. My investment was however worthless. An investment made in India’s most sought after company by shareholders. And I am sure you will agree that 15 years is a long enough long term investment.

This is the nature of high risk investments made for long term needs

This is not a commentary on the Company. It is in the nature of the investment – high risk investment. Shares, debentures, mutual funds, ULIPs, etc. are high risk investments. How these investments play out in the long term is anyone’s guess. If one is lucky, one can possibly make a lot of money. If one is not lucky (as in my case) you could lose all of it. Fortunately I had not invested a lot of money. But suppose I had planned for my retirement funds through such high risk investments, what would I do on retirement. Especially since, post-retirement I would not even find work to earn money. Not to mention my post-retirement needs of may be settling children, buying a house, my medical needs, etc. From where would all that money come from?

Why there is no guarantee to becoming very rich investing in high risk

Suppose you invest Rs. 100 in a high risk investment, may be a SENEX fund or any other share. Suppose the next year the index falls to 90, from 100. Your Rs. 100 is now worth Rs. 90. Supposing that the index next two years rises by 10 % and 8 %, Your original investment of Rs. 100 (which fell down to Rs. 90) is now worth Rs. 106.92, after 3 years. If after two consecutive years of an increasing SENSEX, it again falls by 5 %, your Rs. 100 is worth Rs. 96.23. And in the fifth year say it rises by 15 %, your investment is worth Rs. 110.66. After 5 years your investment is worth Rs. 110.66, which is about Rs. 10 earned on an investment of Rs. 100. You would have been much better off investing in a bank fixed deposit.

Volatility kills profits

This happens because of volatility. That is the constant movement of the share prices, up and down, all the time. Volatility in a high risk investment kills profits. To succeed as an investor in a volatile market, one has to have the knack of timing – when to buy an when to sell. This is a skill not many people can boast off. Nor can anyone boast that he or she gets the timing right all the time. Earning money in high risk investments is not a function of time (how long you hold on to the investment) but a function of timing (at what price you should buy, and at what price you should sell).

This is the reason why the investment of Rs. 100 made in a SENSEX index fund in 1979 will not fetch me Rs. 40,000. Moreover, a significant number of companies that formed the SENSEX basket in 1979 are not in existence today . The weight of the companies within the SENSEX basket changes from time to time. leading to loses every time the weight is changed.

Low risk investments are the best for the long run

Which is the reason that prudent financial investors invest in low risk investments for all long term financial needs. This is also the reason why more than 90 % of all investments in the country are in low risk. And it also the reason why almost all the long term financial needs are met through investments in low risk investments. Low risk investments guarantee that you will get your money back and also guarantee that you will get your money when you need it the most.

And Life Insurance is the best for Long Term Needs

Life Insurance endowment is one such product which can guarantee that you get your money back and also guarantee that you will get your money for the financial need for which you were saving.

Sell Risks Not Returns