Investing is not always about getting the highest returns or beating the markets. It should be about achieving one’s financial goals like safety for family, better life for children, maintaining one’s lifestyle on retirement, building a secondary passive stream of income or creating wealth.
Hence, as financial consumers it is more important to get the macro picture right rather than being too bothered with smaller things. Let me explain this with suitable examples. Do note that the numbers and names are chosen randomly but they would be suited to your personal finances too.
- Ram and Dennis are of the same age and earning similar incomes of roughly Rs 50,000 p.m. While Ram saves 50% of his income and invest @ 6% p.a. while Dennis saves only 20% of his income and searches for high return products which yield 15% p.a. consistently (tough to find though). Fast forward 10 years. Ram accumulates Rs 41 lakhs whereas Dennis dabbling for high return products could only accumulate Rs 27.50 lakhs. While earning high returns are not in our control, focusing on more savings is definitely within our control. Message is focus on Savings and not high returns.
- Anu has a financial portfolio of roughly Rs 2 crores. She has Rs 10 lakhs invested in equity markets and equity mutual funds (roughly 5%). The remaining (95%) are deployed in FD’s and other fixed income bearing instruments which yield her 5% p.a. Anu spends lot of time tracking markets and gets very worried with the volatility. Now let us imagine, even if she earns 20% returns from equity portfolio, her overall returns will only increase to 5.75% p.a. which is still a small number. Was the allocation in equity worth the effort?? Anu would do well to focus her energy on her 95% wealth which is stagnating. Message is focus on good meaningful allocations to get better outcomes.
- Tenali has an overall financial wealth which is roughly Rs. 5 crores. He had invested roughly Rs 20 lakhs in a mutual fund which got stuck because of supposedly aggressive investments. This has given him such a rude shock that he is not able to come out of it. But think of it –this investment is hardly 4% of his wealth. This loss could be made good easily by prudent management of his other 96% wealth. Message is focus on the overall numbers and don’t get disheartened if some small portions go bad.
- Desmond is a rich retired man with financial wealth of Rs. 3 crores with predominant investments in safe investments. He has invested Rs 15 lakhs in equity products (just 5%) and is constantly complaining that equity does not give good returns. His monthly lifestyle expenses are a maximum Rs 50,000. Even if the Rs 3 crores are conservatively deployed, he can manage his regular expenses well. There is no need of equity linked allocation for Desmond which is spoiling his peace of mind. Message is focus on the financial goal and not high returns.
The list and examples can go and on. But the message is very clear. Focus on the big picture which can make meaningful difference to your financial life. Everything else is a plain distraction.
As financial planners, we have been continuously advocating the principles of asset allocation, diversification and cost control so as to make the most of investment opportunities based on one’s risk profile. We believe if Risks are managed well, the returns will take care of itself.
Do connect with me at 98455 57582 or firstname.lastname@example.org, for getting your focus on the big picture in managing your personal finances right.
Wishing you all a safe and exciting investment experience.
- It is very important to consult a Professional Planner/Investment Adviser while implementing any of the above ideas.
- The above are mere suggestions and not Investment Advice as individual cases might differ.
Naveen Julian Rego-CFPCM
SEBI Registered Investment Adviser
22nd September 2020