Monday, 30 November 2015

Savings vs Investments

I lost all my savings in the stock market scam of 1992.
Do I hear other murmurs?
"I lost all my savings in the panic that ensued after the nuclear tests in 1998."

"I lost all my savings when CRB Capital markets shut down."
"I lost all my savings in the new economy meltdown of 2000.”
Or if you want something current then try -
“My savings evaporated in the market mayhem caused by the global financial meltdown of 2008.”

Make no mistake, these are painful statements. All through our lives, we have been repeatedly advised that we must save money for a rainy day. And when we did just that, some of us suffered the misfortune of losing it all.
A penny saved... a penny earned is what I was told by my favourite English teacher in middle school. Unfortunately, that penny doesn't get us very far anymore. Nobody told me about the silent enemy called inflation that could lay waste to the coin that the tooth fairy left under my pillow. Incidentally, I was also taught how to calculate interest by an excellent but stern mathematics teacher. But at that point I did not comprehend that interest was my best weapon against that stealthy enemy called inflation.
Realisation dawns
In high school I was introduced to the dismal science of economics and the world of basic finance. That’s when it all fell in place, the way to safeguard my savings from inflation was to put it in the bank or invest it somewhere. So that I could earn a rate of interest higher than inflation and protect my money.
Life rolled on
I entered the workplace at the age of 22. The saving habit came naturally to me. What with all those sayings ringing in my head, a penny saved...

I was determined. I wasn't going to let that sneaky character inflation get at my savings. No simple bank deposits for me. I was going to beat the hell out of inflation by investing my savings profitably in the stock market. In fact, I would beat the rate of inflation by a wide margin. I was too cool for my own good. And with impeccable timing, I caught the concluding part of the great Harshad Mehta orchestrated boom (caught in the Bulls' tail). But I caught the full impact of the downdraught that followed the famous boom. The rest is history.
Some more...
My financial situation, or shall I say penury, as a result of that debacle taught me some more lessons that none of my English, mathematics or economics textbooks had. A new host of aphorisms pored forth: No free lunch, no pain, no gain...

You see, it is true that you must save for the rainy day. But what follows as a natural corollary is that to protect your savings against inflation you must invest the same in some asset that will earn you returns. Be they shares, debentures, bonds, gold or even real estate.

And therein lies the crux of the issue. All these investment options have been associated with rags to riches as well as riches to rags stories. So investing is a risky business. The higher the return you expect from your investment, the higher the risk you will have to take. Your savings are not savings anymore. When you decide to invest your savings you are crossing the Rubicon threshold. Your savings have now taken the form of risk capital.
Risk capital?
Yes, because that is what it is. Don't panic at the thought. You could put your money in a government bond or in a national savings certificate and that would qualify as almost a zero risk investment. (Actually it is just the lowest risk investment available to you, but that's the topic of another debate). At the other end of the spectrum you have equities, which come with a high degree of risk. So do gold and real estate. But we'll discuss that some other time.

It's time to step back and spell out what we have learnt
  • Saving is the difference between Income and Expenditure
  • You must save for the rainy day
  • Savings have no form and must be protected from inflation
  • When you invest your savings, the same have morphed into risk capital
  • Risk capital can get eroded
  • Risk can be minimised by choosing to invest in low-risk investments
  • The risk associated with each investment changes with time and must be monitored carefully.
The take home from all of this is that the Rubicon must be crossed. This is not a Catch-22 situation. Yes, you must invest to protect your savings from inflation but that investment need not necessarily place your financial future at jeopardy. There are several low-risk investments in the market place. You can structure your investments based on your appetite for risk.
Words of wisdom
I am now wiser. Wise enough to encapsulate all of this into my own saying.
“It is not how much you save but where you invest it that counts” –-Sharekhan, circa 2000.

By the time you get to this point in the write-up, you may be feeling just a wee bit nervous about your savings. Nay, investments. Please do not. At the end of the day, investing your savings is like falling in love. It can be risky and it can hurt, but that doesn't stop us from falling in love, does it? For the heady and glorious experience...

The old adage, “It’s better to have loved and lost than never to have loved at all” may assume a new meaning for you as you turn investor.

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