Avoid guesswork while planning for your future

Last week, I interacted with a group of investors at an event. Almost all of them had made a substantial amount of investments, mostly of the tax saving kind. More than half had investments in equity funds of one kind or another. 

However, an interaction with one investor stuck me as particularly interesting. In about an hour of analyzing his investments, he swung from being vaguely unhappy to supremely confident to somewhat scared about the future

My friend, who is in his mid-40s, had been investing in mutual funds for about 20 years. In all these years, he and his wife have invested different amounts -- mostly equity funds -- in a sporadic manner. Most of the investments were around Rs 20,000-30,000 at a time, although less in the earlier years.

They've never kept a precise track of how much they invested and what the gains for. Still, unlike many such investors, they had dumped all the paperwork and statements in two big box files and  kept them safely .They had a vague notion that in all these years, he had invested about Rs 20-30 lakh, most of it in the last decade, and that it was worth around Rs 50-70 lakh.

Finally, one day, with a few hours of hard work to organize everything, they got to know what exactly was happening with their investments. Look for Property Loan Interest Rate to their pleasant surprise (actually, wild joy), it turned out that the investments were worth almost Rs 2 crore. The power of equity investments, and of compounding over long periods of time, had created a bonanza.

The net result of all this was that my friends' outlook on life took another U-turn. From feeling prosperous and thinking about German cars and Italian evenings, they started feeling seriously worried about the future. At their current rate of saving, they just wouldn't have enough money for all the expenses, as well as sustain themselves after retirement

Even if they worked till 65, they would have another 25 years of expenses to sustain. Even a rough calculation of inflation and expenses over a quarter of a century is a frightening experience.

Some of us understand the magic of compounding on investments, but very few manage to apply compounding to expenses and inflation and then get a feel of what that means for their own future.

[Source: http://economictimes.indiatimes.com/wealth/plan/avoid-guesswork-while-planning-for-your-future/articleshow/53906154.cms]