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BASL Registration Number: 1951 | Non-Individual RIA. Regn No. INA000017620 | Validity Perpetual

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Protect yourself from…Yourself


Mr. Patel has been dabbling in stocks for the last 25 years. He also sporadically invests in Mutual Funds. His TV is constantly on and he surfs all the business channels. He is known amongst his group of friends as the stock market guy and many times they also seek his advice on stocks. He boasts a lot about the profits he makes on day trading and occasionally on his investments. Curiously, he is most active when markets are bullish and becomes very low key when the sentiment is bad. It appears like he is investing when markets are high and not when they are low, then how does he make money. A closer look of his portfolio reveals that most of the stocks he has are duds accumulated over a period of time because he had bought them as trading tips but he could never make a profit on them. Rather than sell at a loss and admit his mistake he preferred to hold on to them saying, some time in future they will rise and I will get out of them.

With a plethora of financial news and views now available in newspapers, TV and internet, a no. of people feel that they understand finance and can take informed financial decisions on their own. They can speak the jargon and sound knowledgeable. Due to this their colleagues, friends and relatives look up to them for advice and the feeling is strengthened. These are what are commonly known as Do It Yourselfers or DIYers.

There is another set of DIYers who would sporadically take financial decisions based on the need of the hour e.g. tax saving. They too would typically consult their friends or colleagues.

Busy Executives

Rajiv, a friend complained to me that his bank manager sold him a regular premium policy with a yearly premium of Rs. 2.5 Lakhs, blatantly lying that it was a Single premium product. It was an easy sale because the bank manager knew that Rajiv had a Rs. 6 Lakhs balance in his account. Rajiv just signed on the dotted line. He came to know about the lie next year when the insurance Company sent him the renewal premium notice. He went to have a fight with the bank manager over the blatant fraud. He encountered a different manager who sympathised with him but expressed inability to rectify the situation. The ironical part is Rajiv did not even know the life cover that policy provided or what type of investment it was.

Rajiv is one of the busy executives/businessmen who do not have time (and inclination?) to look at their finances. Consequently, the idle money in the bank keeps growing and they do feel guilty about it.

In such situation what happens? The first agent/advisor/consultant that comes along with a great product hits the jackpot. The agent is happy that he makes a sale and the investor is happy that he has done his financial/investment/tax planning. Some agents would claim to the investors that their product does all three.

Dangers of DIYs

  1. They take investment advice from their CAs who are more focused on tax savings. In the process diversification may be sacrificed.

  2. Their other advisors are their own colleagues who will boast to them of how one of their smart investment decisions made them a pile of money (Other Mr. Patels. These colleagues never disclose their failures).

  3. Some do not think beyond real estate.

  4. They are vulnerable to get rich quick schemes touted by various agents.

Guys, you need a Financial Advisor.

It is my experience that it takes a lot to persuade these people to seek the services of a Professional Advisor so instead of doing that I will list a few steps by which they can take control of their own financial management.

Write down your Goals:

  1. Making money is not a goal. Money is the medium to achieve and enjoy your dreams and goals.

  2. So the first task would be to write down your goals when you want to achieve them and what would the amount required be. Give free rein to your dreams and list out as many as possible, but be realistic.

  3. The above statement may appear paradoxical but the message here is if the goals are far off enough, you start immediately and commit to and stick to your regular savings and investment strategy you will be surprised what power of compounding can do for you.

Create an investment strategy:

  1. The first step towards this is to make a list of your current investments. Check if you are overly invested in one particular type.

Go through your expenses and check how much you can save on a monthly basis. A check of expenses will show you if you are spending too much on your discretionary expense heads. An easy way to do this is total all the withdrawals from your bank passbook for the past year (I hope you don’t have too many bank accounts), deduct the one off expenses and divide the remainder by 12 to arrive at average monthly expense.

  1. If you have any outstanding housing or any other loans, I assume they are already taken care off by monthly EMIs, which should continue. Never ever avail of minimum pay facility on credit cards or take personal loans. They carry very high interest costs.

  2. Commit to a monthly investment program for this saving (first create a emergency buffer in your bank account equivalent to 6 month expenses).

Devise an asset allocation:

  1. There are 2 broad classes of assets:

Growth assets like stocks, equity funds and real estate

Income assets like Bonds, FDs, and debt funds.

  1. The thumb rule to follow is that for goals, which are short term, say less than 5 years, investments should go in Income Assets. Anything longer term should be in growth assets.

Remember when you think equity or real estate think not in years but decades.

Stick to your Plan

This is the most difficult of the steps and there are hundreds of reasons why it could derail.

There are so many self appointed advisors urging you to go for the sure winner stock or scheme. They could scoff at your own investment plan coming up with ill informed reasons for its failure. Sometimes to continue an investment, certain paperwork needs to be completed and due to sheer lethargy that may not happen.

Those of you who like to be hands on may really enjoy doing all the above steps but if you think it is too much hard work you are better off consulting a professional advisor.

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