INVESTORS often have unrealistic expectations of how much investing gains really contribute to their overall wealth. Those who expect high and consistently positive returns are often disappointed: the reality is that returns rely on many variables and that volatility is ever-present.
Statements like “I’d like to invest RM10,000 every year, and after 10 years, I expect to have RM1 million”, do not grasp that to achieve this, one needs to find an asset that compounds at 19% per annum for 10 years.
Any investment with such high expected returns would also come with massive volatility.
Investors should understand that building wealth requires capital, time, and returns.
While the first two inputs are within your control, the third one can only be controlled to a certain extent – by choosing the right risk level.
Your invested capital makes up more of your wealth than you think
Assume you have an investment goal of RM2 million for your retirement, and you contribute close to RM86,000 yearly (or RM7,200 monthly) over 15 years. If your investment returns average 6% p.a. over the time period, the profit you earn on your investment would amount to circa RM711K.
That means your capital contribution of RM1.28 million is 64% of the total investment amount. The shorter the investment horizon, the larger your capital contribution is as a percentage of the total amount. That realisation, while seemingly obvious, makes it clear that your own capital contributions are more important than the investment gains realised at the end.
Investment goals like retirement or your kids’ education, while necessary, aren’t as exciting as buying a penthouse or sports car. These goals are also far away – say five to twenty years away – and it is easy to lose focus. Quantifying your goals, and being surprised by the amount you really need for your retirement, kids’ education or the down payment on your house is a sobering experience.
Realising how large these financial commitments are, and how much you actually contribute to them (between 60% and 90%) is key to being disciplined about investing towards them.
While lucky bets can pay off, your capital contribution matters
In hindsight, everyone wishes they bought into opportunities like the Covid 19-driven rubber glove rally of 2020. However, it is not likely that the amount one invests into a single speculative investment will be meaningful in the long run.
If you had actually managed to invest RM10,000 into one such rubber glove company before the rally, and sold at the peak with perfect timing, to make an amazing 15x multiple, your total investment would have grown to RM150,000 within a matter of months.
This feat disregards the likelihood of you taking profit along the way or even buying more at the peak, only to see your fortune evaporate in the following months.
While RM150,000 is a nice chunk of change, which one can use to pay down debt or make a significant contribution towards an investment goal, it is simply not enough to retire on. These flukes also simply don’t happen very often.
Investors face a much higher chance of success if they commit to contributing a significant amount of capital over a long period of time towards safer, diversified investments. While putting RM10,000 on a risky bet is exciting, the effort of contributing monthly towards a large goal is more rewarding in the long run.
Using the earlier retirement example, investors would find greater peace of mind in putting aside RM7,000 monthly for 15 years in a safe investment portfolio, ultimately contributing RM1.3 million in capital to yield RM700,000 in investment gains. There is a stark difference in mindset when it comes to earning a quick buck and building meaningful wealth in the long run.
Building towards your goals is empowering
Realising that your contributions can be more than your investment gains is daunting, but Rome was not built in a day. Deciding to dollar cost average monthly or investing your bonus into your investment goals are things that are within your control.
Continuing to contribute to your investments even while enduring tough periods is also a discipline that is built over years. Having a mindset that you are building towards something meaningful, and that your contributions and investment gains are accumulating over time, can be empowering.
When you finally reach your investment goals and harvest your hard-earned money, you’ll realise the years of effort were ultimately worth it.
This article is contributed by Wong Wai Ken, country manager of StashAway Malaysia.
Source: The Sun Daily
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