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Thursday, September 22, 2016

Create wealth with conviction and planning, guess work only lead to fear and greed

It is a general and well accepted belief that now(early) is the best time to invest, equity is the best investment vehicle and S-I-P in #Mutual Fund is the best discipline for  the investors. But, there is more to it. Factor which is important element of investment  or financial planning for that matter is the mindset of the investor. Fear factor and lack of planning can lead to massive mismanagement and wealth erosion. The factors including emotion and goal setting are important to make a risk proof investment portfolio. In the next two paragraph I intend to elaborate on the same.  

Detach yourself from emotions like ‘Fear’ and ‘Greed’

RISK remains a common constant factor in every sphere of our lives, so is investments. We do not stop boarding flights after hearing many hijacks, neither we stop traveling by train when we hear about train accidents, nor even we stop praying to rain god despite suffering floods year after year in various part of the country.

Life gives us choices, and we hope for everything to be in a particular fashion to enjoy life to the fullest,  so does investments, with which we create our estate, wealth pool, our pride. Often we talk about risk profile of investor and planning investment accordingly. So, what defines the risk profile of an investor? – It is his age, health, responsibilities and timelines. Similarly investments too come with various risk factors. And, NO investment is risk free, not fixed deposits, gold, land, equity, commodity, dollar or anything. 

Every investment has its own share of risks and rewards associated with it. For example, we can have a fixed and assured appreciation on our wealth in a short span of time through fixed deposits, company deposits, for long term it may not be able to give inflation adjusted returns and the sum my look tiny compared to the needs of future. In similar fashion, it is not mindful to invest in equity/ related instrument for an year if you already have a set deadline and amount requirement, market may just crash and your investment may show an enormous negative return. So, choosing an instrument should depend on the requirement and timeline. FEAR is only when the expectations areunrealistic. 

But still, we invest and grow. And we like to grow despite all risk factors. Rather than focussing on the risks, a smart investor looks at the possible risk mitigation tool, a plan which helps distribution in asset classes, setting measurable goals and simple execution.  

Why do we create Wealth – Set measurable Goals

Wealth creation is a function of setting goals and plan a disciplined action. We need wealth, but without a purpose wealth cannot be enjoyed. We need wealth for certain purposes, namely post retirement life, vacations, medical emergencies, child education, buying Home etc. There are numerous dreams human have, for a few, we can plan our investments. Planning can include simple S.M.A.R.T formula.

S  - SPECIFIC- To attain something we need to have a specific desire, namely buying  car/ Europe vacation/ education/sabbatical

M – MEASURABLE – Clarity on the expectation and exact outcome. If we know the price of the car is 4 times our monthly salary, we need to know in how many months you will be able to save the amount, or if you will take it on loan, how many EMIs you can finish your loan comfortably without stretching limits.

A-ATTAINABLE –  We can dream of moon, but we need a NASA rocket for that. We need to be able pool in the investment within the current inflow

R- REALISTIC – Expectation of returns should be realistic. If you are investing in fixed income product, you need to know, that the income will be on single digit percentage point and equity will be volatile.

T- TIMELY – Goal need to have a timeline. If your child is 5 year old, it is likely he will go for higher studies in 15 years time, so the investment plan need to pan out in a manner that you have your kitty ready to go within that time period.    

Happy Investing!

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