It's Said Real Wealth is Only in Property and Gold. Think Again...

Who wants to become a millionaire? Of course you do.

The question is - who doesn't want to become one? After all, we work hard to fulfill our dreams and live a comfortable life when the pay-cheque stops coming.

And most invest their hard earned money for various reasons...

• To travel around the world
• To buy a dream house
• Pay for child's education
• Marriage expenses
• Retire early
• Or to just have money in the bank for unforeseen events

People have different investment preferences. Some invest in mutual funds and stocks while some stay far away from them because stock markets scare them.

For most Indians, the preferred investment choice is real estate and gold.

This comes as no surprise.

Real estate and gold have always been less volatile as compared to stock market, making it one of the safest investment options.

If you ask a bunch of Indians what the preferred investment should be, they will tell you the same.

Real Estate is King when it comes to Wealth Creation

A survey taken by Housing.com and National Real Estate Development Council (NAREDCO) in 2020 showed that as many as 35% of respondents preferred to invest in real estate. The next best in line were gold (28%), fixed deposits (22%), and stocks (16%).

Not just India, the situation is similar in the US too. In 2021, 28% of Americans said real estate was their preferred way to invest over a period of 10 years or more. And 16% said they would pick stocks.

Don't Forget Gold

Just like realty, gold is also a traditional mainstay of many Indian households. It is not called "God's own currency" without a reason.

Barring just two years - 2013 and 2015, gold has delivered positive returns in 15 of the last 17 years.

The love for gold in India is also strongly supported by the fact that it's the perfect antidote to a weak currency. Most may not invest for this reason...but the underlying reason is the same. Gold helps protect the value of your money.

People's confidence in making statements like 'gold is the best investment' and how 'you can't lose money on real estate' are kind of true.

One has to agree.

But Why Not Stocks?

Well, for one, they can be very volatile. In a simpler word, risky.

Remember the massive sell offs that have hit the Indian markets in the last 30 years? Right from Harshad Mehta (a scam) down to Covid-19 (a natural calamity).

This has happened so many times, that one has to be respectful of some people's decision to stay away.

If you cannot take any risk, stocks are not for you anyway.

But if you have an appetite for risk, then read on...

Why you should choose stocks for wealth creation

Let's explore how an ordinary person can be the hero of his or her own journey by creating wealth through the cash compounding machine - stocks.

These significant benefits give stocks an edge over real estate and gold.

• Better returns (if you can take the risk)

  Investing in stocks will give you double benefits of capital appreciation and dividend income. A regular dividend income is what separates real estate and gold from stocks. Of course in real estate one can get a rental income, but that brings with it its own set of challenges.

  If you are (and should be) opting for stocks for the long term, they have a good track record of delivering high returns which helps in capital appreciation.

  For instance, if you had simply invested in the BSE Sensex (and avoided the risk of picking Individual stocks), your returns from 1991 till date would have been 14.2% (compounded annual growth rate - CAGR).

  In money terms, every Rs 1 lakh invested then, would be Rs 61 lakh today.

  That's the 'better' return opportunity that stocks offer...but only if you can take some risk.

• Beats inflation

  Inflation eats into the value of money.

  Putting money in a Fixed Deposit at 5%, when the rate of inflation is say 7%, means instead of your money growing, you are actually losing 2% in value every year.

  There are few proven ways of beating inflation.

  Investing in stocks is perhaps top of that list.

  Again, there's no need to do anything fancy here. One could simply buy into an index fund, have an investment tenure of like 10 years or so (what you probably have in the case of property and gold, if not more), and you will come out far better at the other end.

  As we saw above, Sensex has delivered great returns and has also outperformed the returns on most other asset classes in the long term.

• Capital and time factor

  Real estate requires plentiful capital. On top of that, it takes a lot of time to multiply in value. It's a slow and steady grower or wealth.

  Gold does the same. But then it's more for preservation of value, than creation.

  Think about this. Even if you plan to start a small grocery store in your neighborhood, you will have to stake a substantial amount of money on the success of just one venture that may or may not take off as planned.

  Stocks, on the other hand, do not have any capital threshold and you can start even with a small amount.

  You can get a piece of the action with even just a few hundred rupees, let alone lakhs and crores.

  The returns usually come faster too. Relatively speaking too.

  And then again, we are still talking about index funds here when we say stocks.

  Consider stocks as escalators or a moving walkway.

  You know you are going to walk ahead and reach at the top. You will continue to walk, but the escalators or moving walkway (stocks) will help you get there faster.

• Hassle free

  With stocks, the price is right there for you to see. No hassles of negotiating with the opposite party.

  The brokerage is usually pretty low too which helps ensure that a substantial part of your investment is not eaten up by hidden costs.

  Real estate and gold, on the other hand, consume a lot of costs.

  Also, you must consider the hard work and effort that goes into buying real estate in India starting from the rides property agents take you on and ending at a black money-lined road.

• Multiple choices

  There are more than 7,400 listed companies on the BSE and NSE combined.

  Unlike real estate or gold, which are only a single element, you can choose from thousands of stocks.

  A basket of choices are present in front of you and it would be a truism to say that you will try to find the most profitable business being sold at the cheapest price.

  The point being stocks enable you to make such choices.

Stocks come with risks but...

People may counter stocks come with risks attached. That is true. Your holdings may suffer a major blip in case there's a similar situation like global recession of 2008 or the 2020 pandemic.

Stocks are not for the faint-hearted. The boom that we are seeing currently is a perfect example of that.

The Sensex crashed to 25K levels in March 2020 while Nifty was near 7,800 levels during the same time. Today, the Sensex is above 60k levels and Nifty has zoomed past 18,000.

The slump that hit in March 2020 and the sharp recovery a year later would make you wonder: Should you stay away from stocks if they are such volatile?

What you should do at situations like these is avoid the noise around you. Even if the market slumps or stagnates in the coming years, you should stay your course and be selective with what companies you're invested in.

You must first find a successful, tried-and-tested blueprint for stock investing. Spend some time understanding this blueprint. Then, and only then, take the plunge.

You need to know what to do. You need to know how to do it. You need to know when to do it.

Irrespective of the situations, your first rule should be to stay invested in stocks which are of the highest pedigree.

In our view though, stocks are the best place to be if you invest wisely and for the long term.

Don't just consider 5 years as long term. Instead, let your stocks grow from small seeds into fruitful trees over 10, 15, and 20 years.

Stay invested right and let compounding do its magic.

Imagine having Rs 1.7 lakhs for every Rs 100 invested in Infosys. Sounds unrealistic but it's true.

Infosys is just one example. There are hundreds of such stocks that would have amassed generational wealth.

Remember, you won't need 5 or 10 stocks like Infosys or Asian Paints to ride the gains. A few will be enough.

But it's important to be selective.

Being a developing country, the Indian economy will perform well in the coming 5-7 years.

The stock markets will follow.

The level of optimism people are showing in the Indian economy, even in a global pandemic crisis, just shows the immense opportunities India holds.

What you should consider is picking quality midcap or smallcap stocks which possess the ability of becoming a potential large-cap in future.

Not investing in stocks is NOT an option.

This is because no matter what happens, there is always a reason to believe that quality stocks will rise from the ashes through the toughest of troubles.

We must add here that if you are convinced about stocks...but do not want to get involved in selecting stocks, you can always seek professional help. If even that does not work for you, then a low cost index fund maybe the solution.

The takeaway

With enough evidence and explanation, I can happily make my case that stocks offer real wealth generating opportunity, perhaps more than real estate and gold.

The next time someone tells you that real money is in property and gold, and that it has returned so-and-so percent returns over so-and-so years, you know what to make out of it.

Of course, this goes without saying that you must follow certain rules while investing in stocks.

As discussed above, stocks aren't all sunshine and rainbows. There are risks attached. But with proper research, you can get your happy ending.

My point is there are no returns that are 'inherent' in any asset class. They are more a factor of the valuations that are prevalent at the time of investment and the long term fundamentals of the asset class under consideration.

Start by considering factors like risk appetite and financial goals. This will help you realise what amount you should allocate in gold, real estate and stocks. And we must add here that for most of us, you need to have all these in your portfolio. But for different reasons.

Do check out Equitymaster's asset allocation guide that explains how best to allocate your equity investments so as to achieve optimum returns from them.

Happy Investing!