Wealth is an abundance of valuable Assets, Possessions or Money. To become rich, you have to build a wealth at a rate higher than the rate of depletion. The risk reward of building a wealth is equally balanced. Higher the probability of wealth creation more is the risk of losing it. As an investor, you have to adopt the method to build a wealth in which risk reward is more favorable for investors. For example, currently any investment in Real Estate is not favorable to build a Wealth. Investors who bought property in 2013 or 2014 are in loss. The loss will increase manifold if we consider the Home Loan interest paid as a cost. A property in Delhi costing 1.20 Cr is now available for 1 Cr. In short, the investor has destroyed the wealth by investing in Real Estate. It is not a universal truth but depend on case to case basis. In this post, we will discuss the points which can potentially destroy your wealth.
How To Destroy Your Wealth?
1. Herd Mentality:
In my opinion, Herd Mentality is the biggest culprit for wealth destruction. I suffer from Herd Mentality if i know that i cannot take the right decision. We replicate the path taken by others without understanding the Risk Reward scenario. As one size doesn’t fit all, therefore, there is no single mantra or formula for wealth creation. The best example of herd mentality is that we try to replicate the people who have successfully created the wealth using a particular formula. We easily get influenced and try to replicate the same. The relevant example is of one of my close relatives. His friend invested heavily in the real estate and made fortunes. He used to buy property for cheap and sell at a premium of 8-10 lakh. My relative tried and failed miserably. Reason being, his friend never told him that to do so he deployed a lot of working capital as money might stuck in 30%-40% cases. In short, he rotated money between various properties. The opportunity loss of stuck deals were compensated by the successful deals. In short, you should know the rule of the game before taking a plunge.
2. Shortcuts to build wealth:
We believe in taking shortcuts i.e. to multiply overnight. The best example is stock tips. I explained it in my post Stock market Tips – Business of Selling Dreams. I have seen people losing lacs in this kind of scams. The stock market is driven by operators and retail investor fail to understand the nitty-gritty of the same. Another example is of Chit Funds. Not all chit funds are fraud, but i observed that chit funds in small towns and cities promises to double the money in 2 years. Trust me no one can double your money in 2 years. There are no shortcuts to success and it is true for wealth. Any investment should be well thought through and with proper planning. Any shortcuts are highly risky and can potentially destroy your wealth.
3. Past Performance:
We give a lot of weight to past learning and past performance while making investment decisions. The times are changing and we have to change the investment strategy. A strategy which worked in past may not work in future. You must have read the disclaimer in the mutual fund scheme that “Past performance is not indicative of the future performance”. It is true for any investment. The best example is Gold Investment. Gold has delivered superb returns in past but from last couple of years it is delivering negative returns. A good investor should shift gears rather being emotional about past performers. To make this shift, an investor should be well versed with investment conditions and future trends.
4. Increase in % Spending:
This is where most of the investors falter. With more disposable income in hand there is an increase in relative spending, therefore, a big opportunity to build wealth is lost. Let’s take an example, if i earn Rs 100 and my average spend is Rs 60. In this case, my investible surplus is Rs 40 which can be used to build wealth i.e. 40% of earning. Assuming, my income increased to Rs 150 and now my expenditure is Rs 100. In this case, my investible surplus shrink to 33% of earning i.e. Rs 50. Ideally, i should have maintained the same ratio of 40% and should have been saving Rs 60. The increase in % Spending is a wealth destroyer.
5. Gross Returns:
One of the most common and costliest mistake. Another day, my mother was telling me that they have invested X amount in Fixed Deposit at 8% interest rate. Now she is happy with this gross return. I explained to her that she need to pay tax on FD interest and post-tax return will be 5.52%. After adjusting average inflation of 6%, her net return will be -0.48%. It means instead of building wealth, it is destroyed on a net basis. As an investor, you should avoid non-tax friendly assets or financial products. Also, the returns should be calculated after adjusting tax and inflation component.
6. Lifestyle Diseases:
According to recent studies, out of 10 people in India, 4-5 are now suffering from lifestyle diseases. This ratio will increase in future. Lifestyle disease will be next big killer in future. The medical expenses on lifestyle diseases are too high and can destroy your wealth. By taking good care of your health, you are indirectly contributing to your wealth corpus. Therefore, it is important to take care of your health. It is important to avail Health Insurance at early stages of life.
7. Corrective Steps:
Last but not the least, you should evaluate your strategy at regular intervals. If you come across factors which are destroying your wealth then you should immediately take corrective steps. An investor who knows that his actions are destroying his wealth but are not willing to change or take corrective steps is responsible for the self-destruction of wealth.
Concluding Remarks: In my opinion it is very difficult to build a wealth whereas it can be destroyed in secs. As an investor, you should clearly define your goals and focus to achieve the same. I am not saying that we always take correct decisions in life including the decision to build wealth but more imp is to be on right track. If we deviate from our path then we should immediately take steps for course correction. I observed that people who are not willing to accept change and change accordingly suffers the most.
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