Do we really understand compounding?
August 31, 2024Most investors probably already understand the importance of a systematic investment plan (SIP). It is the most convenient way of accumulating wealth by investing small savings regularly. You not only get the benefit of putting your monthly savings in meaningful investments but also get the advantage of cost averaging because of market volatility.
But there is one more benefit which triumphs all the other benefits of SIPs. And this is what Noble Laureate Daniel Kahneman described as system 1 operation. He described the mind functioning as system 1 and system 2. While system 1 is spontaneous, instinctive and automatic; system 2 is analytical, calculated and paranoid. Because it is always thinking, anticipating and worrying, taking decisions is quite tiresome for system 2.
So, when it comes to taking investment decisions, system 2 may start thinking-
Is it good to invest now or should I wait?
Is the current market too high and likely to fall?
Market is low but it is declining further. Shouldn’t I need to wait further?
Lot is happening in the country and in the world. I should wait till things settle down!
I must discuss with other advisors and read a lot before taking investment decisions!
Should I invest in large cap, mid cap, small cap, hybrid or gold?
Should I go for mutual funds or PMS or property will be better for me?
All these reasons become so overwhelming that many simply postpone the decision. Others apply the simpler route and invest as per the advice of their banker, CA or their friend. Few try to do it themselves with small money and wait for the result before making bigger investments.
But these investors are better off Investing through SIPs because-
SIP takes away the pain of constant decision making.
You use the automatic process of regular savings into your advantage.
Even when the market goes down, it is a matter of happiness for SIP investors because she has bought more units in down market.
Regular SIPs make your expenses disciplined. Since you don’t want your SIP to bounce, you tend to cut down on your unnecessary expenses.
Regular savings gives you lot of satisfaction that you have not spent your entire income. In fact, after completing your SIP for the month, you tend to enjoy spending rest of the money without any guilt.
All these are priceless benefits of SIPs. Therefore, everyone including retired people should consider taking SIP even if the amount of SIP is small.
Manoj Pandey
CFP
Mainstream Investments Services Pvt Ltd
