Jumping categories

What kind of saver are you? Let's enumerate the main types, perhaps with some variations.

There are savers who just keep money in the bank, plus a little bit of EPS, NPS, or EPF and some combination. Throw in some fixed deposits and some insurance products (generally ill-chosen), and that's it. The savings menu is complete. The bad thing about this mode of saving is that the returns are poor, and a great deal of money is left lying on the table. However, the good thing is that it gets done. Not only does it get done, it starts early, continues throughout the saver's earning life, and does not suffer from any shocks. All in all, the benefits from starting early and long decades of compounding somewhat mitigate the ill effects of underperforming types of investments.

The next type is the saver, who goes out looking to save more and invest it to get higher returns. This person feels that they are more financially literate and can make decisions that are basically calculated risks. They go beyond deposits and explore mutual funds. In theory, the higher potential returns come with higher risk. Typically, such investors make some good decisions and some bad. However, if they stick to some basics, it works out well. They have to do some amount of research to choose reasonably good funds to invest in. They must invest gradually through a SIP, and they must not stop investing in the face of volatility. As long as they stick to it and let a few years pass, they do fine. Sure, in hindsight, they won't be invested in the best possible funds and earn the greatest possible returns, but it's going to be much better than deposit-type savings, especially taking taxes into account.

One way or the other, these two types of savers get by. The second type does better than the first, but neither of them destroys anything. However, there's the third type, which I might call the chronic maximisers. These are the ones who are tormented by the fear that they might not make money as fast as possible. These chronic maximisers constantly chase the next hot investment idea in hopes of supersized returns.

While they dabble in things like crypto from time to time, their weapon of choice for self-destruction is the equity derivatives market - with a deadly mix of futures, options, leverage, and more. Without even understanding what the trade-offs are, chronic maximisers take on extreme levels of risk with derivatives - far more than their finances can withstand. Decisions are made hastily based on rumours or the fear of missing the next market swing. Intoxicated by leverage, chronic maximisers act aggressively to amplify derivatives bets and end up compromising their financial stability. Generally, by chance alone, a few good trades spur them to take bigger risks, only to get wiped out when luck turns. No high can hide the realities of this kind of trading forever.

In a way, those who suffer a big disaster right in the beginning are the lucky ones. The worst off are the maximisers who win a few, then lose a few more, bleeding cash over time, and eventually suffer what amounts to a slow and deep disaster. This obsessive pursuit of exponential returns through derivatives ultimately ends in financial ruin. For chronic maximisers, F&O is almost always a path to financial destruction.

It's always been obvious to me that there is a kind of personality issue here. The chronic maximisers are what they are. However, even so, one wishes there was a clear path for the ultra-cautious ones as well as the maximisers to end up in the middle category. Ultimately, striking the right balance is key for long-term investing success. Equities have a place in long-term portfolios, but chronic speculators often come to ruin through dangerous derivative practices. Finding - and sticking to - the middle ground is key for every one of us.

Also read: A black hole for your money