Tuesday, April 10, 2012

Not taking risk is THE greatest financial risk...


(The author is the Founder and CEO of Money Avenues, a Wealth Management firm based in Chennai which offers   i.S.M.A.R.T financial plan. Feedback can be sent to ismartfp@ gmail.com) 



Not taking "RISK" is the greatest financial risk...




Surprising!!! ???


But that's the reality. During our times, the greatest financial risk in one's life is not taking risk... Our generation is going through roller coaster lives. We are in an era of reasonably high income, higher lifestyles, higher aspirations, higher costs, lack of time, dwindling investment choices etc.,


We do take risks in life, careers, jobs but when it comes to investing, we tend to shy away from taking risks. And that will lead us to a definite dead end...


Let's look at the reasons why "not taking risk is the greatest risk in our times"...




Sky rocketing cost of living:




While our incomes are running, costs of living are sprinting... Let's consider few numbers...


  • If you were to spend Rs 7.5 lacs for a professional degree for your child now, can you guess what could it cost after 15 years???



Rs 62 lacs



  • If you were to spend Rs 20 lacs for a foreign degree now, can you imagine what could it cost after 15 years???

Rs 1.63 Crores



  • If you were to spend Rs 15 lacs for a wedding now, can you guess what could it cost after 15 years???

Rs. 1.23 Crores

  • Ok, let's see how much would your idli vada coffee breakfast cost you... If you were to spend Rs 60 now, after 20 years...
Rs 990

  • If you were to retire now and you need Rs 50 lacs as retirement fund, after 20 years...

Rs 8 Crores

  • If your monthly expenses are Rs 25,000 now , the same budget after 20 years would be...

Rs 4.10 Lacs


These numbers give very strong indications about the future costs for sure... These numbers should make one realize that not taking risk is the greatest financial risk....


Let's take the case of retirement:
  • Let's assume I need 8 crores for retirement fund after 20 years based on the current estimate of Rs 50 lacs... 
  • Let's also assume I deposit Rs 50 lacs in an FD which gives me an average annual return of 9% for 20 years.
After 20 years...

What I need is

Rs 8 Crores

But what I got is

Rs 2.80 Crores.

with the investment @ 9% returns...


The gap between what I need and what I got is too huge to bridge... And that's the cost of not taking enough risks while investing...


Remember, we are living in a globalized economy, wherein risk taking is a key ingredient for successful businesses. Investing in the stocks of such businesses can only add value to our wealth creation efforts...


Before closing, a recap of the story of five friends...



Story of Five friends:


Mr. Lazy
Mr. Fun
Mr. Cautious
Mr. Calculator
Mr. Smart


All of them put Rs 1 lac at the same time and after 20 years lets see how they have done?


Mr Lazy             @ 6%    - Rs 3.21 lacs  
Mr Fun              @ 9%    - Rs 5.61 lacs 
Mr Cautious       @ 12%  - Rs 9.65 lacs 
Mr Calculator     @ 15%  - Rs 16.36 lacs
Mr Smart           @ 18%  - Rs 27.40 lacs


If you observe, the difference between each one is just 3% in returns, but look at the difference in returns over the period of time... And that's the power of compounding for you my friend... It works very silently... 



Mr. Smart took risks and he was rewarded by the power of compounding...


Remember,


Not taking risk is the greatest financial risk




(The author is the Founder and CEO of Money Avenues, a Wealth Management firm based in Chennai which offers   i.S.M.A.R.T financial plan. Feedback can be sent to ismartfp@ gmail.com) 

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