Pakistan as a country has been struggling to take benefit and ride the tide of industrial revolution.
Our investments, specifically in the export-related sectors, have been considerably lower than the optimal and we have not been able to prioritise sectors which would support import substitution.
One of the key causes for the same is the low level of saving and investment rates.
As per CEIC, Pakistan’s Gross Domestic Saving Rate, calculated as annual Gross Domestic Savings divided by the annual nominal gross domestic product (GDP), stands at 6.9%.
The trend has not been encouraging over the last decade as we dropped into single digit in 2010 and have been struggling since then.
Compared to the likes of Bangladesh at 30.4%, India at 31.4%, China at 45.3% and the US at 19%, this is one of the key causes of our economic woes and requires considerable intervention from the government to induce and incentivise savings in the economy.
As a country, one step that we can take is to educate our children and inculcate this thought process from the tender age. This would internalise a thought within the young ones to prioritise savings over consumption.
It is a considered universal truth that any guidance and teachings communicated during the formative stage would remain ingrained in the child as he moves into adulthood.
Acts seen in childhood and knowledge acquired during the early years have a higher probability to convert into habits and are thus likely to be acceptable to the individual as he enters the investing age.
Knowledge session and videos on banking practices, types of accounts and saving practices should form the foundation of the education process.
The concept of profit rate, being the price of money, its determinants and why is it paid/ received should be at the centre of the teachings.
As the child enters teenage, specific products and instruments like insurance, mutual fund, equity investments, stock market and indices can be introduced to the mature mind.
Compounding, termed by Albert Einstein as the Eighth Wonder of the world, and diversification, the best safety net one can have, should be at the top of the list of concepts explained during the elementary days.
It is suggested that we put forth the following five cornerstones on the path to investment.
Compounding – the Eighth Wonder
It shows how consistently multiplying a number with itself results in the output being a huge number.
A game can be played, similar to the Rice and Chessboard story, which would certainly leave an impression on the mind of the student. The simplicity of the story and the astronomical number at the end is bound to be a lasting memory for the young mind.
Diversification – the safety net
One of the basic risk management activities that an investor can do is to diversify their holdings.
As the age-old advice goes, “Don’t put all your eggs in one basket”, the diversification would create a resultant portfolio which is able to withstand a variety of market and economic movements and essentially hedge against sharp fluctuations in valuations.
Marshmallow Effect – the long haul
An investor should make good investments that have been thoroughly evaluated and are based on sound footing.
There would be volatility in prices over time but the direction would smoothen out over a period of time and would move as envisaged.
Over a sufficiently long period of time, the compounding would work its magic and deliver sufficiently large returns.
Investments should be done for the long haul and delayed gratification should be taught as that would ensure the future adult is not an impulse trader and follows a well-thought-out investment strategy.
Walking the tight rope – want vs needs
One of the key things that our kids should get a grasp on is the identification of the thin line between wants and needs.
For a successful saving plan, it is imperative that an individual understands discretionary spending and knows where to exercise restraint.
The popular 80/20 rule or its offshoot 50-30-20 rule is very useful and can be used as a beacon of hope.
Some 20% of the income should be allocated to savings and the remaining 80% can be spent. Within spending, 50% should be allocated to basic amenities, ie needs, while the remaining 30% can be used in discretionary spending activities, ie allocated to wants.
Leverage and debt
With the advent of plastic money, the risk of slipping into the quick sand of credit card debt has increased manifold.
A judicial use of debt and leverage needs to be taught from an earlier age and ingrained into the basic DNA.
The cost related to leverage impacts not only the returns but also eats into the principal, especially in a non-performing market.
Borrowing costs have a compounding impact and multiply exponentially. Borrowing should be done very cautiously as it takes away the power to hold on to an asset where one has conviction but is struggling due to external issues.
It is imperative that as parents, teachers and adults we follow these principles ourselves as it is a well-known adage that action speaks louder than words.
As such when we act upon these guidelines alongside the theoretical teachings, it is bound to have a lasting impact on the coming generation.
Let us all do our share in laying the foundation for a wiser and prudent future investor generation.
The writer is a student of behavioural finance, a treasury and wealth management professional and a visiting faculty at IBA
Published in The Express Tribune, March 7th, 2022.
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