Last week a few of us were driving back towards Delhi from the interiors of Gurgaon. For those who have not been to Gurgaon – it is without a doubt the most outstanding contrast of beautiful constructions and unfortunate infrastructure. The roads which start with a lot of promise often lead nowhere. Driving though one such street, a friend suggested that we make left and go against the traffic for some distance to reach the main highway. He had it all figured out – “I expect to find police before we hit the main road; they may stop us. We will convince them that we are lost”.

Unfortunately for him (and for all of us), the police it seemed dealt with many lost cases like us. Pretty much on an hourly basis.

The mistake he made is similar to what many of us do with our finance – MISALIGNMENT.

His expectation (of finding cops) was not aligned well with his aim (of ‘somehow’ convincing them).

Click the tweet below to read expected rate of return of some of my twitter connections.

 

When people talk of expected rate of return in stocks they often confuse it with what they ‘aim’ to make over a period of time. The sooner you are able to align your aims with what is reasonably expected, the higher chance of success you give yourself.

Option A. Can you make 70% return in stocks this year – sure you can, you can even make higher.

Option B. Can you make 18% return in stocks over the next 5 years – sure you can, you can even make higher.

Why chose option B? – Because it will happen.

Somehow 18% assured return over 5 years is not very impressive for people. Let me make it a little more attractive. How much money should you invest today @18% CAGR so that you have Rs. 1Cr at the end of 20 years?

Rs. 2,80,000/-

Effectively what this means is that all you need to do to secure your retirement is to invest Rs. 2 lac 80 thousand. Imagine doing it once every 5 years.That’s the power of discipline and compounding.

Why are people not making their crores?

Somehow nobody wants to become rich later in life. It’s far more attractive for people to have a couple of lacs today than over a crore in 20 years.

Moral of the story – Instead of predicting on a daily basis, invest for the long term in stocks of companies managed by competent managers, and finally – Be realistic with your goals.

That’s the only sure way to becoming rich.

It is not hard to make money in the market. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges. It is an obvious lesson, but one frequently ignored. – Burton Malkiel; A Random Walk Down Wall Street.

3 Rules to follow to earn high return in stocks

Be Realistic – The mistake my friend made when he thought he will get by the cops was not one of irrationality. He expected the cops to be there. He was simply unrealistic.

The cops that night were standing their for one thing and one thing alone – to fine people who fit our exact profile. A group of lost people driving back from a party. Thinking that he could ‘somehow’ get past them was slightly ridiculous.

Be in the right mind, be real!

Don’t expect to somehow make 100% return year on year. While you may succeed, you are equally likely to be caught by the cops.

Set Goals – I am sure you know what that means.

It’s OK to pay your investments (SIPs or whatever else) after you pay your utility bills, but it has to be done before you go shopping.

Set goals about how much you want to allocate to stocks. Follow your goals religiously. Start with some limited amount after you are finished reading this.

Stop with the guess work, just invest – hundreds of research work have been carried out – over a longer period of time, investing and holding on to your assets, be it gold, stocks or real estate – has always delivered higher returns than any form of short term trading. Period. What else can I say? May be only that the next decade belongs to stocks.

Actually I am convinced that you do not doubt this fact yourself. You and only you can answer why you get the urge to invest in get rich quick schemes.

Investing for anything less than a few years means only 1 thing. You are either betting on the markets way to much or that you are easily influenced by schemers.