An equity investment strategy churning perpetual flow of money

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Is it possible to create an investment which pays me for lifelong & beyond?  This is a question every investor must have asked himself at some point in time. What if you are told that it is very much possible. There is solid mathematical certainty behind it. Last 30 years of market statistics are also supporting us. You can create such investment & enjoy lifelong earnings. The best part, you can even pass this to future generations as your legacy.

Next question will be why it is not known till date? Well, everyone who has a basic understanding of equities, knows but not realizes because of certain predispositions of financial industry. I highly encourage you to read this article entirely. This can be one of the life changing articles, you will ever come across on Internet.

This is a little longer post but such is the demand of this topic. First, let’s understand why most investments last only for a few years. Broadly, there are two main reasons:

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a) Inflation eats away your money year after year without you realizing it.

b) Expenditure due to various reasons. In some cases, there is an urgent need of money. In some other cases, it’s simply an overspend. There are no dearth of advertisements to make you believe it’s a need for you. After all, social status also needs to be maintained.

Even if we create huge wealth, we need to manage these two factor in order for our wealth to churn cash flow till eternity and this is the main and only challenge here.

To manage inflation, one has to invest in equities for long term. In last 30 years, BSE Sensex has added wealth at an annual rate of 17% while inflation has eaten away wealth at an annual rate of 7.6%. In the same period, Gold returned 11.2%, Bank FD returned 8.4%, Silver returned 11%. So we can clearly see only Equity beats Inflation by a wide margin of 9.4%. Gold or Fixed Deposits are not able to beat Equity by a comfortable margin in long run. This margin is very important for us to create a sustainable withdrawal rate.

Expenditure can be managed but not avoided. You should have proper Insurance be it for health, life, property or liability. Such insurance will help you to contain sudden & uncontrollable money outgo. It is also advisable to have an emergency corpus in hand that can manage any remaining expenditure risks.

Now, you know how to manage these factors, let’s come to the investment vehicle. It’s a very simple solution, invest your money into a Balanced fund that can give you an annual return of 12% (let’s stick to conservative estimates). With 12% average wealth creation rate, you can let inflation eat away at 7.5% and still withdraw money at a rate of 4%. With this expenditure discipline, your money will never loose against inflation while power of equities will let you withdraw at a rate of 4% per year till eternity.

Image result for worried investorBehavioral Challenge 1: You need to be very disciplined with prescribed withdrawal rate. It’s like a golden egg laying hen, if you kill hen, its gone. Take one golden egg at a time which is easier said than done. Imagine you have 1.5 Crores, would you not tempt to buy Mercedes or spend on luxuries rather than living life at a standard of 50k per month.

Behavioral Challenge 2: Returns will not be straight forward @12% year after year, it will be something like +40%, -25%, +8%, -3%. So you stay on your predefined withdrawal path & don’t get intimidated by market fluctuations.

Intelligence Challenge 1: Past performance do not promise future returns! What if inflation drops to 4% (current rate) or it shoots up to 12% in future? Well, in that case equity returns will auto adjust themselves as well. Equities Return % = GDP % + Inflation + 2%. All you need to do is to stick to max of 4% withdrawal rate, rest will take care of itself. Please note that above formula for equity returns may not give exact numbers every year but over a period of time it will certainly fall in line, once economics tries to re-balance itself with change in inflation or GDP numbers. We will write in detail about it some other day.

When I say eternity, I mean till the time stock markets exist, economies are running, people are buying & selling goods. There may be hiccups such as recession and wars but eventually this economic juggernaut will keep on running. If North Korea decides on a nuclear war or asteroid hits earth, then none of this will matter, so it will still be everlasting till humans last.