Monday, 28 December 2015

Personal Finance Lesson from Hare & Tortoise story

We have all understood from the traditional Hare & Tortoise Story how 'Slow & Steady Wins the Race'!!

Well, this is true even for personal finance.

How may times you have heard a colleague or a friend or a relative boast of making 50-100% returns on a stock in 4 months? Now, the same friend or relative or colleague would not tell you what he lost on his other bets in his quest to earn some quick money. And, if you happen to speak to him a few months later about the experiences from his stock picking, he would definitely be far less enthusiastic.

This happens because the stock markets are the worst place to consistently make a quick buck.  (Notice the emphasis on 'Consistently') In fact, almost everyone trying to get rich quick in the stock market ultimately comes out brutally scratched & injured - and then blames the stock market!!

He is the proverbial Hare in the story - Excited & Active, Misplaced confidence in his abilities to beat the system consistently.

Compare the above behaviour with someone who follows the most boring & unimaginative but consistent strategy of investing regularly through a Systematic Investment Plan (SIP) over 10 - 15 or 20 years. Look at the following chart (Assumption: Rs. 3,000 invested per month):

This is the result achieved by the proverbial 'Tortoise' in the traditional story!!

Moral: The longer the race, the more startling the margin of victory for the Tortoise.

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