Investments are meant to make money but there are investments where every one of us has invested and lost money. Some may argue that they have not lost money mathematically but financially everyone has lost money.
1. Investing In Insurance
Insurance is all about getting insured period. It is an expense that you need to bear depending on your lifestyle, assets and liabilities. If you try converting your insurance expense into an investment you end up nowhere and I have explained that time and again. Check out Can you Afford Investment Linked Insurance?
There is an interesting poll in the above article and the result of the poll is amazing.
My views about Is Insurance an Investment Option triggered discussion by members leading to Is Insurance an Investment Option? Reader’s Viewpoint where the poll has very interesting results.
People agreed that they made the mistake of investing in insurance but not any more. So what’s your take on insurance as investments?
Have you lost money investing in insurance?
Is the answer to the above question yes, great. But if you haven’t lost money investing in insurance you are calculating things mathematically and not financially. Investing 1L and getting 4L after 20 years is mathematically not loosing money but financially you have not gained anything.
Let us continue the discussion from the first point. You invested 1L and got back 4L after 20 years. Mathematically you have gained 3L on your investment of 1L but have you actually gained anything?
So let me first explain in simple terms how mathematical returns differs financial returns?
Financially the calculation is such that if you have 1L Rs at any give point of time, you could buy list of items. Let us call this list as “List A”. After 20 years if you have 4L Rs, so now if you could buy the same list of items in our original list A, you have not gained anything. If you could buy less items, you have actually lost money and ideally you should be able to buy lot more items then we had in our list A.
The rate at which prices in our original list A increases should be less than your rate of return on your investment or else you will not make any return on your investment.
The rate at which prices of list A increases is termed as inflation.
Let us put the Indian average inflation index for last 25 years.
If we analyze the rate of returns on our investment, we got compounded rate of interest close to 7% which is what the average return on investment being offered by most of the non market linked insurance policies. Now the simple average inflation rate for last 25 years is above 7.5% and so every one of us who have some money lying idle in banks or any other such non-market linked insurance has lost money due to inflation at some point of time.
3. Equity Markets
If you are in markets, you possibly know about stop loss. Stop loss as I prefer to put it is; When you plan any trade or investment, you are ready to take a position in market because you see an opportunity but if your trade does not go as you expect then you are ready to loose the amount you have kept for stop loss and come out of the position. At some point of time, everyone in markets looses money but it is the overall time period or overall portfolio of our stock that actually helps you to make money from the market.
I lost money, I loose money and I will continue to loose money in market but I also make money and I continue to make money from market as well and so the aim is to make more money in profits than losses. So overall I can say I am making money from the market. If you are in market where you think you can make money without loosing it, you are making one of the biggest mistakes of being in the market.