Myths about wealth creation that could cost you dearly

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When it comes to wealth creation, everyone has their own story about how they created wealth. Listening to families, relatives, and friends becomes inspirational, and it sometimes gets easier to believe that the same strategy can work for us. That said, some ideas related to wealth creation might be great but, at the same time, not true. Let’s take a look at few myths that might cost you in the long run:

Saving is the way to become wealthy

Saving is always a wise decision than spending money, but this doesn’t guarantee that you will become wealthy. Consider yearly inflation, which has hovered about 7% on average over the last decade. When you save in the traditional savings bank account or fixed deposit account, it only gives 3% and 5.50% returns per year. The value even diminishes if your money is kept ‘idled’ for years in the savings account.

Earning less than inflation equals wealth destruction. In comparison, if you had placed your savings in equities funds, you could have gained approximately 12-14% per year and therefore acquired wealth.

To build wealth, you must invest in an asset class that earns a higher rate than inflation. Otherwise, you may be accumulating wealth but not generating it. Thus, it is not only saving that makes one affluent; rather, it is investing in the appropriate financial instruments that make one wealthy.

Provident funds will take care of my retirement

It is true that life expectancy has been on the rise, but it also indicates that you would have to work for more years so. The critical question is whether you will retain the same vitality and zest when you reach 65 or beyond. Additionally, it may be challenging to find work after the age of 60. All of this may have an effect on your revenue at some point.

Additionally, while your provident fund may have grown over time, your overall savings must reach a predetermined amount. If you fall short at the time of retirement, establish a separate retirement fund and begin saving until you reach your goal.

Timings are essential while investing

As the market currently is highly volatile, especially when the Sensex is nearing 60,000. You might think that it is not the right time to invest and wait for the correction in the market.

When market volatility is high, it becomes impossible to time the market, leaving investors to decide whether to stay in or exit. However, timing is irrelevant if you are in it for the long run.

Under these situations, investors’ best course of action is to diversify their investment portfolios to hedge against the risk associated with significant volatility. When investing, do so with conviction and with a two- to three-year horizon in mind. Additionally, one should have a long-term perspective and not become discouraged by short-term volatility.

Protect your portfolio by diversifying more

Diversification leads to better returns; however, diversifying in one category of five equity funds can lead to significant overlap between the underlying stocks, thereby being ineffective beyond a certain extent.

Rather than focusing solely on diversification, seek out diversity. If you invest in equity funds, diversify your holdings by investing in both large and midcap companies. A portfolio should contain about three to four funds. Additionally, diversify your holdings across asset classes — equities, debt, and cash.