X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Investing: Slow and steady wins the race! - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jun 30, 2006

    Investing: Slow and steady wins the race!

    Noel Whittaker, financial author and investment advisor rightly said, "Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing. Those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it."

    Getting rich is not an easy thing. But, it is definitely a simple thing. It just requires 3 things: income, time and discipline. Many of us would be having income and time. All that is required is a pinch of discipline to find the perfect flavour. In this article, we highlight the power of regular investing, which is simple yet has the ingredients to make your investment a healthy outcome.

    Compounding: Compounding is a financial phenomenon that makes time and money work in your favor. It is what happens when your investment earnings are added to your principal, forming a larger base on which earnings may accumulate. And as your investment base gets larger, it has the potential to grow faster.

    For example, if you had Rs 5,000 in an account that paid 5% annually in simple interest for five years, you'd earn Rs250 a year, for a total of Rs 1, 250 in interest. In this case the interest rate and the yield are the same - 5% per year. But the same Rs 5,000 investment paying 5% interest compounded annually for five years would produce a total of Rs 1,381.41 in interest. Because you are earning interest on your interest, the yield - an average of 5.52% per year - is higher than the interest rate.

    The real magic of investing comes when you combine the power of compounding with continuous and regular investments - in other words, discipline. For example, if you start with a amount of Rs 50,000 and add only Rs 250 per month, you would have Rs 180,000, Rs 525,382 and Rs 1.4 m after 10, 20, and 30 years, respectively. No wonder Albert Einstein said that compounding is the eighth wonder of the world.

    Dollar-cost averaging: Dollar cost averaging also known systematic investment (through SIP for mutual fund schemes) is a technique to reduce market risk through the systematic purchase of securities at predetermined intervals and fixed amounts. Instead of investing in a lump sum, the investor works his way by slowly buying smaller amounts over a longer period of time. This spreads the cost over several periods, thus providing insulation against changes in market price.

    Let us assume you decide to put Rs 100 every month in an investment that is currently selling for Rs 10 per share (for this hypothetical example, let us assume that there are no additional charges). The first month you invest Rs 100 and receive 10 shares. Now if, in the second month, the market falls and the price drops to Rs 5 per share, your Rs 100 buys you 20 shares. The market rebounds in the following month, the price jumps to Rs 10 per share, and for your Rs 100 investment, you again receive 10 shares.

    Benefits of cost averaging
    Investment (Rs) Share Price (Rs) Shares acquired
    Month 1 100 10 10
    Month 2 100 5 20
    Month 3 100 10 10
    Total 300 25 40
    Average cost = Rs 7.5 (300/40)

    As you can see from the above table, you now own 40 shares after a total investment of Rs 300. The latest price is Rs 10, but the average cost to you was Rs 7.5. While this is just a short-term example, by being disciplined and remaining with the program is the key to the long-term success of dollar cost averaging.

    Sure, investing in the stock market has risks. There is always the chance that the markets will go nowhere for the next 5 or 10 years and you shall end up no better than where you started. But then, discipline is a way not to eliminate risks but to minimise them. Regular investing combined with the power of compounding will help you earn adequate returns on your investment over a long term.

     

     

    Equitymaster requests your view! Post a comment on "Investing: Slow and steady wins the race!". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    The Key Factor Pushing Gold Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    How Unique Are the Companies You Invest In? (The 5 Minute Wrapup)

    Aug 21, 2017

    One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 21, 2017 (Close)

    MARKET STATS