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Home > India > Business > Business Headline > Personal Finance


5 investment myths debunked


Personalfn.com | May 30, 2008 12:50 IST

Few would dispute the fact that investors today are better informed as opposed to their counterparts from previous generations. The barrage of investment advice and information from various quarters is largely responsible for this phenomenon.

However, the prevalence of investment myths is something that hasn't changed over the years. And acting on a myth while getting invested, always has the same result -- an incorrect investment decision.

In this article, we debunk 5 popular investment myths.

1. It's too early to plan for retirement

If you are in your 20's and comfortably placed in terms of your career, retirement planning is unlikely to be high on your 'to do' list. Instead, buying a car, going on vacation to exotic locations and acquiring the latest gizmos are likely to have more appeal. Nothing wrong with that, but this shouldn't be at the cost of retirement planning.

It's never too early to plan for retirement. On the contrary, the earlier you begin, the easier the task will be. With more time at your disposal, you will be able to explore various investment opportunities and easily accumulate the requisite retirement kitty. The key lies in recognising the eventuality of retirement and working towards providing for it. This will hold you in good stead over the long-term

2. It's fine to take on higher risk in rising markets

How often have you heard that, particularly when equity markets are surging northwards and all market-linked investments seem like easy pickings?

The urge to 'ride the rising markets' and make a quick buck can be hard to resist. Even the resolve of the most steadfast investor can be tested. And to some it makes perfect sense -- when equity markets are on a roll, why hold back?

Here's why -- your risk profile doesn't change in line with changing market conditions. If you are a risk-averse investor, you stay the same even in the event of rising markets; similarly, a risk-taking investor continues to be one even if markets spiral southwards.

Sure, your portfolio might need adjustments based on changing market conditions. But at all times, the investments should reflect your risk profile and asset allocation based on the objectives that you have set out to achieve.

3. Why diversify? Equity is all I need

The ability of equity (as an asset class) to outperform other asset classes over longer time frames is well-chronicled. Based on the same, the conclusion drawn is that holding a portfolio comprised of just equity/equity-oriented avenues is good enough and that there is no need to diversify across asset classes.

Notwithstanding the positive attributes of an equity investment, investors are often guilty of ignoring its high risk-high return nature. Then again, the returns that you hope to clock from an equity investment would depend on (among other factors) the fund/stock that you have chosen to invest in and also the timing of your investment.

For example, several investments in tech funds/stocks at the peak of the tech boom in 2000 failed to deliver for long time periods. Hence, it is pertinent that you hold a portfolio comprising of various asset classes like fixed income instruments, gold and real estate.

This in turn will ensure that a downturn in any asset is offset by an upturn in another (since various assets have varying cycles), thereby ensuring that your portfolio is safeguarded at all times.

4. Investing is a one-time activity

Assume that you have made investments in various avenues and asset classes that are right for you. In other words, you have in place an investment portfolio that is geared to take care of your financial goals. So is it time to put your feet up and call it a day as far as your investments are concerned? Not quite.

Don't make the mistake of treating investing as a one-time activity. Even the best of investment portfolios could become redundant over a period of time. This is because with passage of time, your risk profile and needs may change. Hence, it is vital that your portfolio be reviewed regularly and necessary alterations made, when required.

5. Investments should be made only for tax-planning

Surprised to read a statement like that in an article about investment myths? Don't be. It's a reasonably common belief that if you are well-heeled, you don't need to invest, except perhaps for the mandatory tax-planning investments. The underlying assumption is that a healthy financial condition at present is good enough to provide for all future needs as well. As a result, investing is perceived as an activity that can be avoided, save for the obligatory tax-panning one.

However, there is one factor which turns the above hypothesis on its head -- inflation. Simply put, inflation is a situation wherein too much money chases a limited number of goods; this leads to a fall in the value of money. Often inflation is expressed in terms of a rise in the general price level. For example, if a product costs Rs 100 at present and prices rise by 5 per cent annually, you will require Rs 105 to buy the same product a year hence.

And one way to counter inflation is by making investments in avenues that grow faster than the inflation rate, like equities for instance. This will not only ensure that the value of your money is preserved, but it can grow significantly enough for you to achieve your financial goals.

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