Idea that Works: Savings vs Investments

I lost all my savings in the stock market scam of 1992.

Do I hear other murmurs that say -

"I lost all my savings in the panic that ensued after the nuclear tests in 1998."

"I lost all my savings when CRB Capital markets shut down."

Or if you want something current then try -

"I lost all my savings in the 'New' economy meltdown of 2000."

Make no mistake- these are painful statements. All through our lives, we have been repeatedly advised that we must save money for a rainy day. And when we did just that, some of us have suffered the misfortune of losing it all.

A penny saved...

... is a penny earned is what I was told by my favorite English teacher in middle school. Unfortunately that penny doesn't get us very far anymore. Nobody told me about the silent enemy called inflation that could lay waste to the coin that the tooth fairy left under my pillow. Incidentally I was also taught how to calculate interest by an excellent but stern Mathematics teacher. But at that point I did not comprehend that it (interest) was my best weapon against that stealthy enemy (a simple preference for English over Mathematics?).

Realisation dawns

In High School I was introduced to the dismal science of economics and the world of basic finance. Thats when it all fell in place - the way to safeguard my savings from inflation was to put it in the bank or invest it somewhere. So that I could earn a rate of interest higher than inflation and protect my money.

Life rolled on

I entered the workplace at the age of 22. The saving habit came naturally to me. What with all those sayings ringing in my head - a penny saved...

I was determined. I wasn't going to let that sneaky character 'Inflation' get at my savings. No simple bank deposits for me - I was going to beat the hell out of inflation by investing my savings profitably in the stock market. In fact, I would beat the rate of inflation by a wide margin. I was too cool for my own good. And with impeccable timing, I caught the concluding part of the great Harshad Mehta orchestrated boom (caught in the Bulls' tail!). But I caught the full impact of the downdraught that followed the famous boom. The rest is history.

Some more...

My financial situation or shall I say penury as a result of that debacle taught me some more lessons that none of my English, Mathematics or Economics textbooks had. A new host of aphorisms pored forth- No free Lunch, No pain-No gain...

You see it is true that you must save for a rainy day. But what follows, as a natural corollary is that to protect your savings against inflation you must invest it in some asset that will earn you returns. Be they shares, debentures, bonds, gold or even real estate.

And therein lies the crux of the issue. All these investment options have been associated with rags to riches as well as riches to rags stories. So - Investing is a risky business. The higher the return you expect from your investment, the higher the risk you will have to take. Your savings are not savings anymore. When you decide to invest your savings you are crossing the Rubicon threshold. Your savings have now taken the form of Risk Capital.

Risk capital?

Yes, because that is what it is. Don't panic at the thought. You could put your money in a government bond or in a NSC and that would qualify as almost a zero risk investment. (Actually it is just the lowest risk investment available to you, but that's the topic of another debate). And at the other end of the spectrum you have equities, which come with a high degree of risk. So do Gold and real estate. But we'll discuss that some other time.

It's time to step back and spell out what I have learnt