Tag: Beginner Investors

I got an interesting question in my mail box – “Can you please coach me on How can I overcome my casual approach towards my finances and live a good financial life?” 

The thing is that deep down we already know how to live a good financial life; the issue is that we are somewhere unwilling to take the required actions. Personal finance is not a rocket science; it simply has some hand full of things that you need to do. It is not about “How to” live a good financial life; it is a matter of choosing wisely and to make commitments to the actions that are required.

Someday I am going to sit with my advisor and sort out my finances,

Someday I will go for financial planning,

Someday I will do something with the idle cash that I have

Someday I will alter my investment style

Someday I will buy a term plan

Someday I will increase my investments

Someday I am going to buy my own house

Someday I am going to complete all my pending actions

Someday I will read all the nice articles that are starred in my inbox

Someday I am going to read entire article archive of Manish

And Someday I am going to organize my finances?

Give me two days and I will show you what I can do with my finances. This Someday syndrome always keeps you away from wealth creation in life. I re-collect a line from a famous movie Day and Knight “Someday. That’s a dangerous word. It’s really just a code for never” .

The code to your financial success is in your hands. Today you can choose to bring a dramatic change in the way you live your financial life. What you choose today determines the quality of your financial future. The “Someday investor” is all about hoping, wishing, desiring and wanting things to happen in his/her financial life. The truth is this really does not serve you in your financial life.

Once an old Cherokee is teaching his grandson about life –

A fight is going on inside me, he said to the boy. It is a terrible fight and it is between two wolves. One is evil – he is anger, envy, sorrow, regret, greed, arrogance, self-pity, guilt, resentment, inferiority, lies, false pride, superiority, and ego. The other is good – he is joy, peace, love, hope, serenity, humility, kindness, benevolence, empathy, generosity, truth, compassion, and faith.

This same fight is going on inside you – and inside every other person, too. The grandson thought about it for a minute and then asked his grandfather, which wolf will win? The old Cherokee simply replied, the one you feed.

What are you feeding your financial life? – “specific actions or someday actions”. Specific is being committed, someday is being casual. When you make a choice to be in action you gain leverage over other investors. The more specific you are in defining your actions the better your financial life gets. Keep feeding your commitments. Keep choosing. Keep taking actions. This blog is your sacred space, it is for you to add different dimensions to your financial life, if some conversations trigger new thoughts or actions than allow that action to happen and don’t forget to share your actions with us. Leave your questions in comments section and we will try to incorporate them in future articles.

Lastly 2011 is about to close its doors, why don’t we take this opportunity to lock our “someday” behind the doors of 2011 and step forward with commitment in our hearts. Wish you all a very prosperous 2012.

This post was written by Nandish and this post was taken from our finacial coaching blog where we keep on writing these kind of coaching conversations from time to time.

Today I am going to write on a simple topic which will highlight some basics of personal finance, which you can see as axioms or the core rules of personal finance. If you understand these simple rules then you can probably build lot of understanding and strong knowledge about money. Some days ago I heard Subra saying a one liner – “I strongly believe it requires a brilliant mind to understand simple things” and it is so much true to personal finance.

If you want to learn personal finance in a better way, you don’t need to look at all the policies , all the products and 100’s of topics . All you need is in the start is to build a strong foundation of understanding some of the core rules of money . If you know these core insights, you will automatically be able to see all the complications and secrets behind the complex world of personal finance. I can see that most of these points are nothing but common sense .

1. When you invest in Safe products , Its nothing but Lending

This can’t get simpler. When you choose products like PPF, Bank FD, companies FD, NSC, KVP, Infra bonds, RBI bonds etc … You are choosing safe investment product, where the money will come back with a high guarantee … Now with these products its foolish to expect very high returns, you are doing nothing but lending your money to someone else so that they can expand their own business. In case of Companies FD, your money is used in Companies expansions.

In case of PPF, it is used by Govt. In case of Infra Bonds, it is used by Infrastructure companies and in case of Bank FD’s, it’s used by banks to lend it to other people who are in need of credit. So your money is used by others. You are nothing but a lender, lender and only lender; get that point. All you will get is some near inflation returns or even less.

When you put money in stocks, Mutual funds, ETF’s, Index Funds, Real Estate etc, you are not lending money to anyone; all you are doing is putting your money in some business or an idea. You share all the good and bad phase and its effects and  become part of profits or share the risks involved. You can get high returns or low returns or negative returns and that’s not happening because of some secret, you have chosen it yourself.

So if you invested in HDFC Top 200, you are agreeing to take ownership in Reliance, Infosys, Bharti Airetl and dozens of other companies. Your investment will depend on their future and how these companies perform. If you expect 20% return without any risk involved, come on!… Wake up. Over the long-term these investment options will perform good , but in short-term there will be a lot of volatility, which can scare you .

“Where should I invest for next 5 years to get maximum return and minimum risk?” . This can be a question from someone who really has no clear idea of basics. What is being proposed here is just not possible. The safest investments at any point are Bank FD’s or PPF. See how much return they are providing. If any other product offers higher returns than these, there has to be higher risk associated with that, otherwise wont every bank will put their money in these high return product itself and enjoy.

So if you want more returns, then you need to be taking more risk. Else it’s not possible. Over short-term, there is no chance you can get high returns with high probability. Its only accidental and on luck.

All the companies offering Mutual Funds, Term Plans, Endowment Plans, ULIPs, Health Insurance, PMS, Motor Insurance, FD’s etc are all in existence only for one reason i.e.- to make excellent profits for themselves. Don’t expect charities. If you are obese, then your life insurance premium or health insurance premiums have to be more than some normal person. Don’t feel bad about it. It’s perfectly ok and ethical from company’s points of view. Even you would do the same thing what companies are doing if you were to run that business.

If you are investing in Mutual funds, AMC’s are bound to charge Fund Management Charges. Insurance companies are there to take your money and exploit your attitude of “If I get something back, the product is good” mentality (example) and throw all the useless policies at you. If you have a Relationship manager assigned, his main job is to motivate you to keep investing your idle money in company’s products and less of helping you with personalised services.

5. You are never sold something, you always buy it

Don’t try to get sympathy of others by telling them “An agent came to my home, threatened me to shoot and took my signatures on the policy, he sold me that policy” or “My uncle created a situation where I had to buy it”. While that might be the case at times, please accept that you were wrong and you need to change that attitude, or else you will keep blaming what happened to you, but never yourself. It will create more problems in your life. A nice short article on mis-buying from subra.

If you have not inherited lots of money or are not working on something great which will make you millionaire soon, then probably you will work for salary for most of your life and your financial life will be mostly like majority people. If you are enjoying too much today at the cost of future, then there are tough times ahead for you.

People burning their money in useless spending today do not realise that they are eating money from their retirement corpus right now, they are putting pressure on their future at this very moment, just because its years away, you don’t realise all this, but one day you will remember all this. Look around people who are retired today, how many of them are self-sufficient and totally independent, enjoying their life to fullest and exactly the way they dreamt all their life ? Not many . Do you want to be like them ?

7. Not taking risk is extremely risky in today’s world

I remember how one of the person I was talking on forum told me that he keeps all his money in FD’s and PPF and LIC policies , because he does not want to take any risk , All I asked him was “What are doing now then ?” and he didnt understand what I am pointing at .. If you are like that and hate to put your money in Equity , don’t like to spend time on your financial life , don’t like to take time from your busy schedule to organise it , your are already taking a high risk in your financial life , you are distancing yourself from a good financial life each day and each moment. You will probably meet all your goals , but may be half-baked, not on time , who knows !

So what is your learning from these basics of personal finance ? Do you feel more knowledge in yourself now ? Which of these points do you think is hardest for other people to understand ?

Does cricket have anything to do with your financial life? I say, Yes!. Cricket and Financial life have some amazingly common things! There is much,  we can learn from cricket and implement in our financial life. Both cricket and Financial life involves achieving goals. Let’s see what we can learn from cricket, to use in our financial life.

1. Chasing a big score is easy, if you have a good start!

In cricket, making a good score within the first 10-15 overs helps a lot. It’s much easier to score 300, if you’ve already made 80-100 runs in the first 10 overs. However if you make a very bad start; losing wickets and not making enough runs, you will have to work much hard later to reach a good score. We see this in every match. Once the first 15 overs are, well over, we have fielders placed well, all over the field and everyone is warmed up. So, a good start in the start of the match compensates for the slow run rate later, and at the end you get a good score.

In the same way, your time, at the starting years of your financial life is like a precious “wicket”. Dont lose it. The longer you have in your hand, more is the risk you can afford to take. Saving more in the start helps a lot in building corpus. For example if you invest Rs 10,000 per month for 30 yrs , you will build a huge corpus at the end. However if you decide to save additional 4,000 per month and invest 14,000 per month for first 10 yrs , you can then stop your investments and leave that accumulated corpus to grow for 20 more years to reach the same corpus. So an extra saving of Rs 4,000 per month makes sure you don’t have to take on a much larger load later. The assumption is that you get 12% return on your investments.

2. Each team member has his place in the team

What will happen if you decide to have 11 Sehwag or 11 Zaheer Khans in the team? Will India win? I doubt it! A good team has a good batting line up, great bowlers, a wicket keeper with really safe hands, and quick, sharp, athletic fielders. Having a team that is extremely dependant on one single ability, would mean that we ignore other areas and leave big wide gaping holes which in turn lead to failure… big time.

Having 11 Sehwag’s would mean we can theoretically score 400-450 in 50 overs, but then we won’t be able to stop the other team by chasing, because we will not have a great bowling attack. In the same way, if we had 11 Zaheer Khans, we might bowl out the team under 150 runs, but won’t be able to chase that tiny total either. So a balance within a team is required.

In the same way, our portfolio is a team and it has different team members like mutual funds, direct equity, ULIPs, Insurance, PPF, other debt products and of-course – cash. Each of these have different functions and are useful in different ways. You can’t afford to have your team always stuffed with a single kind of financial product unless you are super-expert in that. You can definitely favor one product or strategy, more than others, but only if you know what you are doing. This can’t be the case in general for a common investor. One cant have only equity all his life or only debt products all his life ,you need to have balance and their comes asset allocation.

3. You can’t hit sixes & boundaries every time. Just make sure your run rate is awesome!

This is my favorite! If you look at any match, 6s and 4s are always there and that what most of the viewers like to watch, but you can’t deny that the actual score comes from 1s and 2s; runs which players make consistently. It’s the core of the score. There are bowling deliveries which has to be identified well to hit boundaries, but if one tries to smash every ball out of the park, failure is almost certain! All the wickets will fall sooner rather than later. A team has to make sure that they keep taking singles and doubles consistently, and hit boundaries on weak deliveries.

In the same way, in our financial life, some years can be awesome with 50% or 100% returns like 2010-2011 or worst like -50% return in year 2008 , However dont get disheartened by these extreme years, you have to make sure you make average good returns consistently each year and keep moving towards your target. Its much easier to get 12-13% return on yearly basis compared to getting 40-50% year over year. There will definitely be times when you will make amazing returns from your money. It could be stocks, mutual funds or real estate. But don’t get used to it!. Look for a good average return overall, with great returns once in a while. Having said that, don’t feel bad if there are some years which are bad and your money does not grow a lot, because even in cricket, there are some maiden overs! . If you didn’t score any runs in an over, it does not mean that you have lost the game; it just means that you are facing a strong bowling attack.

Don’t lose your sleep over it. If you look at the world cup final between India and Sri Lanka, you will appreciate the fact that India maintained its run rate till the end and made sure they preserve the wickets till end and that’s the reason it become very easy to chase the score and finally play some winning shots with the backup of our wickets in hand. In the same way, you need to ensure while chasing your goals, that you maintain a good run-rate year after year. There will be good years and bad years, but don’t let them weaken or slow your run-rate.

4. Things can go wrong! You need to be nimble & re-evaluate your strategy

A lot of unexpected things happen in a cricket match. For example there can be a bad start with very low run rate, fall of important wickets, excellent fielding by the opposing team etc., which might make you feel as if the game is all over, but there are many occasions where the losing side has won. It all happened, due to focus, being calm, reevaluating the situation and finding the strategy of what’s to be done “now.” With slow and steady progress, and some calculated risks there are many matches where losing side have won.

In your financial life, there can be many issues like losing the initial years of your life without investing any money, loss of income, change in taxation rules which affect you badly, many bad years without any good returns etc., and all this can make you feel that you will not achieve your targets on time. It’s true, that situations get tougher and reduce your chances of getting closer to your goals easily. It does not mean however, that things are over! You can always take charge of your financial life and really fix it. You can spend good time over your financial life and be extremely committed to make it awesome. Learn personal finance, find out how to get better returns from your investment, be more aware of what precautions can be taken etc. You need to be more alert and keep evaluating your strategy for improving your financial life.

Can you share more learnings from cricket which we can relate to personal finance ? Also, share if you like the analogies in this article ?

What kind of investor face do you have ?  Each and every one of us leads our financial life in a different way and we have an internal design, based on our beliefs about money. In my interaction with thousands of readers and dozens of paid clients, I can see each one of them with a face and I am sure you would be able to identify yourself with your face today. You will enjoy it 🙂

Cribbing Investor : This investor always find problems with the system, he keep on blaming Regulators, agents, companies and everyone else but not himself! He cribs at every one and about every thing around, from how he was mis-sold an endowment policy 8 yrs back to how IRDA never responds. The biggest mystery is how the agent “forced” him to pay! Did he shoot him or what! You can find him on all the reviews site complaining about some product and how he was cheated.

I-want-everything-Free Investor : This one needs everything for free or at throwaway price. He’ll say “It’s very expensive,  Will get back to you later” to a financial planner after hearing their fee, and then he’ll buy a ULIP with 100% allocation charges in first year! . He won’t find this expensive enough! You might be the right advisor for him and they badly need your help, but the moment you tell them it would actually cost something, they would say “Ohh .. Tab to nahi chahiye” ..

Lost Investor : These are the investors who have literally no idea about anything! He gets confused between Filing Tax returns vs Paying Tax. They get confused between IRDA, SEBI and RBI! If an agent comes to them and shit jargons on their face, they will most probably buy it as they feel bad to admit that they are dumb in the area of personal finance. This guy also thinks that 80C is compulsory and keeps buying unsuitable products every year with personal loan.

Fun-Making Investor : These investors are very naughty. They are experts and make fun out of situations. If they get a sales call, they ask tough questions like “Can you tell me IRR of this product?”, which leads to a call escalation to the senior manager and fills the trainee with guilt! This guy also records the call and posts it on youtube and facebook (example). For them, sales call they get is nothing but a way to practice english speaking, its free and no one points out their vocabulary mistakes!

Virgin Investor : These are fresh entrant in the area of money, who don’t even know what’s CTC and Take-home salary and choose the jobs based on CTC figures and cry later. When it comes to personal finance, they have no idea of how customer cares irritates, why disclaimer is written in small fonts, how agents look at them as targets! . They also feel that CFA or CA are great in personal finance.

Not Interested Investor : They are just not interested in Investments. Only at the gun-point you can force them invest and even then, they will start an SIP of Rs 1000/per-month and start skipping their breakfast ! . They dont claim their LTA, medical bills & even HRA, it’s too much of documentation and you have to physically move from one place to other, not worth the effort! And why take term insurance for spouse, they can always re-marry.

Fantasy Investor : These investors live in fantasy world when it comes to money. Even in today’s world their aim is to become a “crorepati” (calculate). Misselling a product to them is an easy thing, make product illustration with unrealistic numbers & present it to them, make sure you have cute children pictures on it, it helps!. They also learn Forex/Currency trading or Future & options and think they can do it part-time. They also have many investment books with bookmarks !

Pissed-Off  Investor : These investors get pissed off with everything. If Insurance company increases the premium because they are smoker, they get irritated . If their demat account charges him a yearly fee, he is irritated. He is also irritated because his mutual fund now ranks 3rd, which was a top performer when he bought it. They get pissed off at ICICIDirect site for not opening at right time and they are forced to sell their stock at Rs 156 instead of Rs 157 sometime back ! .

Informed Investor : Tele-marketers really cut their name from their lists, as they get embarrassed each time in front of these investors by talking something non-sense. These investors happily let their SIP’s run irrespective of markets. They were able to conclude that term plan is the only insurance product they should buy and not Endowments, as they know maths and are open to use their common-sense.  They dont go for the free coffee mugs at investment seminars conducted here and there!

No-Idea Investor : These are investors who have no-idea about things in their financial life. they often find their insurance policies and other important papers here and there. They struggle to mention the funds name in their portfolio . Their Policies get lapsed often,They have no idea why they are saving, Their demat accounts are active from years and they have no idea that they are paying yearly charges . They never match the actual spending and their credit card bills, ever!

Tax-Saver Investor : These investors are really mad about tax-savings!. Their financial life is at mercy of tax-saving products. You can suddenly see a new energy in them after Jan 1st each year. If you need blood, you can get it from these investors provided you convince them that they can get a tax exemption on that. Mention a section like 80K or 80Z for faster response. His last wish in life is to find out everyone involved in designing Direct tax code and then kill them to death one by one, slowly!

Read these 7 tax saving tips with Video

Mirror exercise to change your financial face

I am sure you were able to identify which face above resembles yours 🙂 . Do you think you were born with that face ? No ! . We all are born with same face and while we were growing up and finally entered this stage , something happened ! and we got a face and there are many factors which resulted in it . Starting from our upbringing , our relationship with money and how kind of memories we have about money .

Lets do a short exercise which would help you change your face and give you a new direction. Make sure you do this exercise seriously, else just skip it.

Step 1 : Look into a mirror and think about all the situations like investing , thinking about hiring a planner , when you got to find out those hidden charges in the ULIP , when customer care does not entertain you etc . Note down what are your expressions.

Step 2 : Go back and see which faces above resemble your expressions , It can be a single face or mix of some faces , which is fine .

Step 3 : Now look at your own financial life closely. If you look deeper I am sure you will be able to identify some things in your financial life which would are just not working, you feel stuck at it . It can be “not able to save more” , “Fear of loosing money” or something like “I keep delaying taking actions” .

Step 4 : Now ask yourself, how do those financial faces which you are carrying from years is helping you to in solving your financial mess ? How do you use the energy from your current financial faces to transform your financial life ? I am sure you will not have any clue because that the blocking point ! . You financial face which you are carrying from long time , would not help you in coming out of your stinking financial life.

Step 5 : You need to change your face, now ask yourself which is that face/faces above which if you had would help you ? Which would make sure you slowly change the way you look at your financial life . Try to change your face soon , slowly , but do it !

Note that this small exercise is for you to realise that its only you who is responsible for your current financial face and your financial life . So let me know which expression will empower you as an investor?

Conclusion

When it comes to your financial life, Have a good face. Go for a facial. Hire a financial counsellor or mentor in your life, who can guide you and show you the possibilities which you have never imagined. Read some stuff which would help you transform your financial life . So which face resembles yours out of these 11 faces ? Which one do you think are negative faces and which one’s are positive? Share your thoughts ?

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A readers tell me : ” I invested 4 lacs in Sectoral Funds and now its down by almost 45% in one year. Now I need the money for my Sister Education in next 1 month, Should I withdraw it or wait for 1 month ? Manish , please advice ..”
I asked “But why did you invest in Sectoral Funds or even Equity” ?
Reader :  “Because I am a High risk Taker, that’s why”

I call it breach of trust with your common sense. My hands were literally itching to slap this idiot when I heard this. We have to re look “Risk Taking” all together again . I have already talked about Risk here at How much risk you should take and Understanding your Risk Appetite .

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What are the two elements on Risk Taking?

In our country most of the people are willing to take risk.  They will say that they are risk takers , they have high Risk appetite , they love challenge, and all kind of nonsense. But they forget to consider their “Ability to take risk”. Its not important enough whether you are willing to take risk or not , your situation should also allow you to take risk. Ignoring your “Ability to take risk” can lead to situation like above example.

So mostly there are two components of taking risk .

1. Willingness to Take Risk : This depends on our inherent nature, our attitude towards life, finance domain , Knowledge of financial products etc. Our whole upbringing will contribute towards this, because our willingness to take risk will depend on our inherent self , who we are from inside . So you can either be extra cautious by nature and may not be willing to take risks or you can be a big risk taker who is willing to sell his pants and bet money on anything. This is answer to “Can you take risk ?”
2. Ability to Take Risk : This is the next Important part in Risk taking. Does your situation allow you to take risk or not ? It has nothing to do with your willingness to take risk , you can be very much a risk taker and dieing to bet on the next multibagger or invest in that 100% return a year mutual fund , but you have to consider a worst case at the end. You have to visualize the worst case as if it has happened after you take that risky decision . This is answer to “Shall you take the risk ? “

Let us have a close look at definition of RISK .

Boom !! .. So Risk is composed of two parts .  Probability of Event occurring should be the secondary thing one should look at and Impact of event occurring should be primary. See the picture below to understand it visually .

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Probability of Event occurring : Most of the people unconsciously think about this. It happens a lot in case of Life Insurance , a general argument is that the probability is very less for them to die and hence they take the risk of not taking adequate risk cover through Term Insurance because they loose money if they don’t die ,  idiots! (See this post to understand the reason) . Same case with buying a mutual fund which has no credit to itself apart from a 100%return in last 1 yr even though its 8 yrs old fund and have a return of 8.7% since inception. The probability of these mutual funds giving return may be high, but in-case they fail, the impact it can have on your investments can be fatal , especially if you have not considered its impact on your short term goals. So the person in the example above never thought of the impact on his short term goal of Sister Education . He only considered that chances of event happening, which was low  (mutual funds going in losses) and if he is a risk taker or not , but he never considered how it will impact his goal. Even though the chances of something bad happening is low and he is personally fine with it mentally by taking risk, the right decision was to better not take that risk because the goal associated with it was very important and the impact is severe overall .

Impact of Event occurring : This is the primary thing one should look at and then take a decision. Until an event happens its very tough to imagine it, that’s the reason you should literally close your eyes and try to visualise a situation and try to feel about it . So if you want to avoid a Term Insurance just because you never get your money back and you want to settle down with a money back policy (Like Jeevan Tarang from LIC) which gives you 10% of the insurance cover you actually require for a premium you can really afford,  try to visualise a situation that you died and now your family needs the money after you are gone . Visualise how are they managing , Visualise how your dependents are already emotionally terrified and how they will fulfill their financial goals without you ?

Does it mean we should not take Risk ?

I am not against taking Risk . I love risk taking personally (but my ability to take risk is limited) . We are only talking about taking calculated risk here and being aware of what is the outcome of what we do. Risk comes from not knowing what you are doing. So take calculated risk. Know what can be the impact of taking a decision and be ready to face it when it happens. if you are not happy with the impact, don’t do it . “Not taking a risk” is another very severe risk people do. “Not taking a risk in your life if you are ok with the impact” is equally bad . So not taking risk can also have a drastic impact in your life . Below is a nice video i found for you to get motivated to take Calculated risk .

Conclusion

Recently I came to know that one friend of mine met with an accident while crossing road in Bangalore. He used to cross roads in hurry, because waiting wastes time and meeting with a small accident was not a high probability event ever. Though he was a probability genius , he forgot the impact part of this event . He is safe after this accident but impact could be much worse. Mathematics can never win infront of logic .

Finally at the end I would like to summarize this article in short. We take all sort of decisions in life regarding money , relationship , marriage , health and all of those decision have two parts, First is our willingness and how we feel about it and second is the impact its going to have in our life. This post is to build your FPQ (Financial Planning Quotient , I coined this term 😉 ) and that’s the most important thing. Taking a decision is last thing , understanding what you are doing is of utmost importance . So now their are some questions unanswered , which i will leave to you if its applicable to you .

• If you have a Endowment policy , its totally safe and secure , but have you thought of its impact in our life when they mature at the end ?
• If you are avoiding Health Insurance of your elder parents because of high Insurance premium , Do you also understand that the Probability of them getting some health problem is very high and the Impact is pretty severe . So when it actually happens you will wonder why you were foolish earlier.
• Is the travel Insurance of around Rs 110 worth when you go for air travel within India from one city to another or for that matter from one country to another (charges are not Rs 110 in this case)  ?
• So if a mutual fund has given 150% return in last 1 yrs, has it happened without taking any risk? and are you ready to face the other side of coin ?

Don’t forget to put your Comments  !!