Stubbing the toe on Wealth Creation

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When we talk of wealth creation, many people tend to switch off as they think it is not for them - it’s for the money bags! There are others who would feel that this tiresome topic detracts one from enjoying life and financial advisors keep reiterating on savings all the time that there is no fun left in life! These are from the two extremes.

There are many others in the middle who want to create wealth but are unsure as to how to go about it. Also, there are lots of misconceptions dogging them at every step due to which they tend to go wrong in many of what they do.

Let me try to dispel some of these wrong notions here.

A)  Money should constantly be churned to the best performing asset class -  This is a major fallacy among the public. People want to move their money to whichever asset class is doing well at that point in time. This has become a fad with people. When Gold is doing well, they want to move their money to Gold; from there it will go into equities, real estate, FDs etc. Depending on what catches the mass frenzy at every point.

This moving from one asset class to another presupposes that one will get the timing right. Also, moving from one asset class to a completely different asset class changes Mostly, the public at large gets the timing horribly wrong and get in after the asset has run up and get out after the rally has waned. Both ways, they get it wrong and hence end up with a poor yielding mish-mash portfolio.

B) Yields are very important -  A portfolio is to be constructed after due consideration of liquidity, risk, tenure, return considerations, credit quality of the investments under advisement etc. Yield is a byproduct of a proper portfolio construction. A well constructed portfolio offers an optimal return which would suit the person concerned.

The yield from such a portfolio should be enough to meet all the goals - that is how it should be planned. We have seen that even portfolios yielding 9% overall are good enough to meet all the goals in life. It is a huge fallacy that the returns have to be sky-high to ensure that one’s goals are achieved.

Sticking with the budgets and discipline while investing are important. In fact these are the only things that are important.

C)  Portfolios should be constantly monitored - Many of our clients keep looking at the portfolios as frequently as they refer to daily newspapers! Portfolio once constructed will have to sit there and has to be given time to perform. By constantly looking at the portfolios they are not going to somehow perform miraculously. One will only get palpitations by looking at the gyrations of the portfolio values in line with the fluctuations of the markets.

It makes sense to look at portfolios once every half year. That’s what we do professionally! And that is more than enough!

D)  Every single component of the portfolio should do well -  Another fallacy… Portfolio components are put in place to offer diversification in the portfolio & make it a well rounded portfolio. Obviously, different segments of the portfolio would do well at different times. That does not mean that one should get out of some portions which are currently not doing well. Having different components in the portfolio is part of the strategy. That cannot be undone on the spurious premise of lower returns.

E) I will invest when I have decent money to invest - This is a chicken and egg situation. You get to decent money only when you have invested for long, in a disciplined way. It does not matter if one has a modest amount to invest, to start with. MFs allow even investments of Rs.500 - so the entry barrier is really low. Also, there is no point in accumulating first in the bank account and then investing the same, when it builds up to a decent amount like say Rs.25,000. People like to invest round lumpsums. There is just no merit in holding more than the required amount in the bank and earning a paltry 4% on it.

F) Investors want to invest in every product that comes into the market -  Investors somehow feel that they should not miss any “opportunity” that comes their way. Hence, any shiny thing that gets advertised promptly gets their custom!

This results in a jumbo portfolio of unwanted components, when clients come to us. Investors also attribute their actions to diversifying their portfolios!

G) Humoring the uncles & friends -  Insurance is bought not on merits, but based on which uncle or which friend’s wife is cornering one “to complete their target”. Most people we meet have lots of life insurance policies, by not of the right kind. Most do not have the required cover, even though they have over a dozen policies with them. It’s better to help people directly than to get into an unholy mess with one’s insurance portfolio.

H) Tax savings at any cost -  Indians somehow have this penchant to save taxes, at any cost. They would borrow money to save tax! In their extreme overreach to save taxes, they sometimes forget the basics. The products they buy ( like insurance ) may save tax for them but may not be suitable for them in any way.

I) Wrong advisors -  Most investors are just doing what their friends & colleagues are doing or what their parents have been doing ( like investing in FDs ). This kind of investing ensures that there is no overall strategy or direction and serves no purpose at all. It is like one blind man leading another!

What worked for their parents may not be what would work today. One needs to carefully evaluate one’s needs and invest or if that is too much for them to do, they just need to go to a professional advisor, preferably a Fiduciary.

Conclusion -  Investing principles are pretty simple. One just needs to stick to the budget and invest the surplus as per plan. There is no need to keep shuffling the portfolios or keep investing in new stuff. One need not have to keep agonising on yields - the returns will come - overtime.

We have found that the ones that end up with decent amount of wealth are not the one’s with huge earnings, but the one who has been disciplined and travelled along the planned path diligently. 

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Stubbing the toe on Wealth Creation

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

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