The goalpost for the use of common sense in investing shifts with time. It has a direct correlation with the prevailing knowledge and financial innovation. In the old times, people saved on physical assets like precious metals or jewellery. It was common sense to hoard them.
With the evolution of money, it became the way to save. People started hoarding cash and building savings in a bank account. Investing was all about buying real estate. Yet again, hanging on to something that you can touch physically or that is tangible. That continues to date. Although there is a visible increase in savings and investments through financial assets, the penetration of financial products in India remains low. It is perhaps why businesses selling financial products, such as mutual funds, insurance, and banking services, are booming in India. The future of common sense savings and investing is driving the current market value of financial services companies.
As a percentage of gross domestic product, the penetration of most financial services like loans, car loans, education loans, home loans, life and health insurance, mutual funds and equity assets is well below the global average. If India is to become a developed country, its financial services sector must be robust, with deposits, investments, and a vibrant trading activity in the equity, debt, and currency markets.
There is a lot to absorb if you wish to learn about investing. Financial assets are now the asset class for your financial future. Even physical assets like gold and real estate can be held in the form of a tradable security or a mutual fund. If you are new to investing, you do not have the baggage of a history of hoarding your wealth in a physical form.
Once you determine that financial assets are the way forward for your investment life, you fall into this vortex of financial information. There is so much of it that can overwhelm you, and that would be a good enough reason for not absorbing it.
John C Bogle, the founder of Vanguard, a company that probably manages more assets than the wealth of several nations, wrote in ‘The Little Book of Common Sense Investing’ that the winning strategy is to own all of the nation’s publicly held businesses at a very low cost. You will find numerous references to index investing and books written by Mr Bogle throughout the internet. Financial writers choose to quote him to encourage you to start index investing.
The easiest way to implement his winning strategy is to own an index fund and create wealth for your future self. Benchmark indices like the Nifty 50 and the S&P BSE Sensex have done well for you if you remained invested in index funds for 10 to 25 years. Index funds are designed to mirror the returns of those indices. So, the return generated by benchmark indices is the return you get. When you redeem your investment, you pay only long-term capital gains. It is the most productive asset that you can own effortlessly, beat inflation comfortably and create wealth for your family. In today’s world, index investing can undoubtedly be your first step and probably your only investment strategy. American households did that knowingly or unknowingly when they channelised their retirement savings towards index funds. The household wealth in America today is primarily due to that strategy. In India, it is just the beginning. If you do not wish to dive deep and learn about the right time to invest, the correct type of assets to invest in, and tax management, you must put your money behind companies that use their capital efficiently and generate profits year after year. It is no rocket science—just common sense.