Category: Psychology and Wisdom

Ability to take Risk vs Willingness to take Risk

Posted on by Jagoinvestor

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 .

\text{Risk} = (\text{probability of event occurring}) \times (\text{impact of event occurring}).\,

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  !!

How Career affects our Financial Planning

Posted on by Jagoinvestor

“When you grow up, What do you want to become ?” , and the general answer is Doctor, Engineer or Pilot . That’s the story of 99% people . I just wonder if some kid today says “I want to become a Financial Planner” , how will his/her Parent React ?

They will either think he is an alien or they will find fault in their DNA .

How career affects financial planning

So here is the main question. Where are we in our Life, in our Career? I bring this important question because one of my client 2 days back told me that He is not happy with what he does and he is looking forward to do something which really satisfies him and therefore he cant make long term commitment.s of doing SIP , Paying Regular Premium Payments etc etc, because he is not sure if he can take it anymore.

He is a well earning Software professional , but he actually never enjoys his work and actually wants to be into something like Education or Music which he loved always but had to give up because His parents wanted him to not waste his Life .. LOL . Now I am not a Magician who can fix all the problems like these .

Relation between different aspects

We are today going to talk on how your Career affects your Financial Planning . Lets see how things are related and dependent on each other .Our Goals in Life are important to us, We need money to fulfill them , at least most of them .Money comes from our Jobs and Jobs come to us from our Education (most of the times) .

And Our decision of what we get in Education , from where do that come ?

Here is the root cause . Ask any MBA aspirant why he is preparing for MBA ? What kind of answers do you get ?

  • My friend is also doing it
  • What else can i do ?
  • Good money in MBA

Same problem with Engineering and others Jobs . How many people do you know who say “I love what I do” .. “My day is amazing everyday at work and I am so happy to be at work” . Lets see a typical situation of an average Indian which is happening from Decades and needs to be changed .

“Borrowed dreams don’t make for happy realities”

What happens with average Indian in Career

“Dont let your Schooling come between your Education”

How Career affects our Financial Planning

Finally I come to the point . So for acheiving our goals and satisfying our needs of daily life , we need consistent flow of money from our Jobs , Consistent money can come in two ways

1#. You don’t truly love what you do in your Job , but keep doing it no matter what , and get your Salary every month

I don’t need to explain much here , but you smart to understand and picturize the situation , these people do not like what they do , but are dragging

from years in the same company or same profession.

These are people who make decent money from their jobs , but they are internally never satisfied from their career and somewhere unconsciously are afraid of the fact that If they loose the job or leave it themselves ,from where will cash flow in to meet the expenses .

Life is long, if you are just 25 or 30 in this situation, this situation may not look very bad to you , but wait for some more years , once you have other responsibilities like a Family and Children ,Regular Bills and Education costs , you will so stuck .

One of my friend in Pune says that “It comes to his life daily morning when he has to leave for office, He just dont like the work he does” , This is critical situation .Our lives today is full of stress , Problem at work , Issues with Marriage (Amazing Book I am reading these days) , Unhealthy life style and many more like these and combined all , It has deadly effects.

In coming years you will have to plan for your expenses and money will come from this job which you hate , and then it will be tough situation . These people unconsciously worry a lot for their Financial Goals like Child Education , Marriage , Retirement etc because they somewhere know that there are greater chances of not excelling at what they do because they just cant perform better and what is expected out of them .

These are the people who make Investing mistakes in hope for big returns because they want to fulfill their Financial goals as soon as they can .  Most of the people in this category do things like one mentioned in this article

I know people who earn 90,000  per month but they are the most negative people I have seen when it comes to their future , and yes they tell me how idiotic job they do .

2#. You Love what you do in your Job and get your Salary every month

Now this is a very different Situation , here you love to do the job , Your satisfaction part is already fullfilled . If you not paid for what you do , you can still do the job sometimes and wont feel about it . I charge clients for the Financial planning , but I do not charge my close friends when I do it  .

I am not paid there .. but Its fun to me , Its something I enjoy . Every new article is a challange for me,  Its never a job for me .  Every new comment is an appreciation and a message from you that I am being read and I write wonderful 🙂

As per a famous Chinese proverb “Find a job which you truely Enjoy and you will never have to work after that” . People who love their jobs already solve one of the big issues in daily life . When they are at Home , they are more cheerful , more energetic and tend to make a better environment  around them .

These poeple Financial life is also better because they dont have a mental pressure of “making themselves fullfilled” at work . These people know that they are going to get much better in what they are doing and someday will reach heights , where they will have much better salary and hence it will help them that time if they are unable to save and invest today .

I am not saying that they dont save or invest, but they are not worried for their future .  Read an interesting article on “Can you live with 90% of your Salary ?”

I know a person who is 23 and recently left his Software Job to make a career in full time blogging , He earns more than 1 lac per month now .

What is the Solution ?

Oops .. Its a tough problem to solve . The best thing I can think of is

1. Identify first if you are happy to do what you are doing , make sure you understand that you are going to do it for 20-30 yrs . I am referring to people in Software especially , because most of them just know it sucks .

2. Identify what you like to do and how can you make a career out of it . Career 360 is a good place to look for some career related stuff

3. Gradually start upgrading your skills and get some education in the field and in the meanwhile create a buffer of money which will support you for some 1-2 yrs if things fail and you can get back to what you were doing.

4. Gradually shift to other field once you are ready to make a move .
One thing is sure .. If you do what you love , you worry least about salary hikes , office politics , worry for slowdown and most important “getting Fired”, you have that amazing confidence that you are the powerful person in your job because you will always excel at what you love to do .

What should be the Ideal Situation

We have to plan for different things in life , some are small things and others are very important in life . Below is the list of things I personally feel are extremely critical for a successful Life .

Life Planning

Each of them is dependents on the things coming next in life . Your Education decides what Job will you get in , Your Job decides how much you are happy and how much you make in money terms .

This combined with how well you choose you Life partner and how great you plan your Family decides your Life ahead, and at the end what we discuss on this blog comes “Financial Planning” . It depends on various small things we generally ignore 🙂 .

So you need to ask following Questions

1. Do I love my job ?

2. Even Though I feel I love this Job , Is there something I can do better and Make a much better career ?

3. If I had to do my current work for next 30 yrs , Am I mentally Ready for that or Will I just Die out screaming !! .

4. What is it that I like to do and what are the career opportunities in that field ?

Answer it yourself 🙂

Conclusion

This is a very Important aspect you need to think about , Financial Planning is totally dependent on how comfortably and happily manage to get the cash flow in your accounts . If its a burden on you rather than a enjoyful event, you are bound to get screwed some time in coming years .

Forget how to choose the best Mutual fund and what is the cheapest Term Plan or What is the best way you can invest your 2 lacs kind of silly questions .. They are idiotic questions which we try to find answers for , answer these real questions in life first .

Comments

I am sure my writing this article at 3:30 am in morning will not go waste and you will provide your valuable comment on this .

Why don’t you let me know about what you feel about this and to what extent you agree on this, Can you suggest some ways out for this problem?

What do Friendship and Marriage teach us about Investing?

Posted on by Jagoinvestor

Friendship and Marriage, are two important things in our life .. The principles of good Friendship and good Marriage also apply in Investing also.

Whether its Mutual funds OR Direct Equity. key is having Small group of good friends (Mutual funds) and giving enough time and trust to your Partner to have a long lasting and successful Marriage( Mutual Funds or Stock Investing).

friendship and marriage

Friendship

“One loyal friend is better than ten thousand family members.”

We should have some good quality friends who are there with us for long term . They are not 1 month or 2 month friends, they are friends who are there us for long term, like Years !!

There are some people who we need to make friends with but for short term, may be because they are there for us for small time or they are good with us for short term, once they show there true colors, better search for better ones, Its too difficult to change nature of a friend.

Mutual Funds are like Friends, Have less of them and have long term friendship, There are many people/Mutual Funds, which look very attractive in short term, they will be very nice to you, will give amazing returns to you in 3 month or 1 month, and this will attract you, make you feel that “he/she is a good one”, but give some time and they show you the true colors.

Just like you need to have 2-3 very good friends, they same way have just 4-5 very good Mutual funds, whom you have seen for long term, reviewed from some website (valueresearchonline), have done your own study and saw there long term performance (5+ yrs). You have to understanding long term performance of Equity.

If you have 5 friends, still there are thousands of other people who can become your good friend if you give time and spend some effort, but that does not mean that you will leave your old friends and start making new friends with others every year.

You have to understand that there will always be some people who are good, potential friends, but you have to skip them and not think about them. Just concentrate on your current friends and deepen your friendship with current one’s.

The same way, there are hundreds of mutual funds in market and you cant just choose the best of them, All are good and potential long term investments, all you can do is to choose some of them and develop a long term relationship with them, understand them, Trust them in bad times and be with them, Juggling between friends will leave you no where but with an impression that you are choosing the best.

Therefore, just have 2-3 Friends and 4-5 good Mutual funds (max 6-7) .

Tip : So if you have more than 6-7 mutual funds in total, Better say bye bye to some of them, not because they are bad, but because you cannot give proper attention to all of them. Have some of them and have them for long.

Marriage

“The secret of a successful marriage is always a Secret”

I have seen most of the Marriages/Relationship breaking or “on the rocks” f0r mainly one reason, “Not giving enough time to understand the other person”. This is my view.

Most of the people be in a Relationship/ Marriage and within months or maximum 1 year, Judge the person and loose patience. They do not give appropriate time to the other person to actually show their real face. Everyone in this world has many different faces/moods and you cant know a person in a short span of time, You have to give them time and trust them that they can be your dream spouse.

There are good and bad times in Marriage , You see both the times and have to trust your partner in bad times also, that there will be some time in future when you will see good days too, provided that you have chosen your partner carefully. There are times when you are there with wrong person and then you have to suffer all your life :).

I have seen many people do similar kind of mistake with there mutual funds and shares, If their mutual funds and shares have given good return, Great !! If they do down in some loss without giving them any returns in start, They are just “Bad mutual funds”.

What you have to understand is that you have to give enough time to your mutual funds to see their actual performance and what they have to offer. Good and bad times come and go, You have to trust your Mutual funds or shares. See list of Best Mutual funds for 2009

“Take time to choose your partner and after that, be with them, trust them, grow with them, Talk to them, try to understand them, and communicate, DON’T second guess and suspect there performance”

Tip : If your mutual funds have given bad returns or less than expected return, ask your self, if you have choosen them after lot of consideration and trust, If not, remove them, if Yes, then dont worry, give them time, they will come up with the returns you have expected from them, they just need some time to show what they are 🙂 .

Comments

Let me know what you think about this, Can you suggest something else which teaches us from real life about investing.

Note : I will be in Delhi for 4 days from 22nd – 25th and then back to Bangalore on 26th 🙂

3 stories that might change your perception about your own financial situation

Posted on by Jagoinvestor

Today I am telling you 3 short real-life stories. This is a random post, which I thought would be a good read for all the readers not because it gives you some knowledge or it teaches you some financial stuff.

But It might change your perception of your own situation and how lucky you are to have what you have.

change perception about financial situation

#Story 1 The Broken Person

A poor man from “Belha” village (District Sonebhadra, Uttar Pradesh) has 5 children. Some years back he had to sell his cattle and some household things to pay for hospital expenses for an accident. The Expenses were just Rs.3,000 After that incident their life got miserable day after day.

For years they are living a life which is unimaginable … They work in other fields and as a labourer’s whenever they get some work. They don’t get work for more than 50 days in a year. They have to travel to nearby “towns” which by my standard itself are poor villages.

They earn close to Rs.10-15 by working in Fields and around Rs.30 as labourers. But most of the time they get work in fields only. One of their children died last year because of malnutrition and all of them had nothing to eat for close to 4 days, not even a single meal.

Other children survived somehow. On an average this family eats once a day, sometimes full stomach if they are lucky. From last many years the only sweet thing they have eaten is some “sugar”.

Because of bad monsoon this year there was no work in fields, Last Month this person comes to my hometown to earn some money by pulling Rickshaw.

There are already hundreds of people like him in my hometown doing that work and one more person in that list will not worsen the situation of unemployment, So its fine I guess. He thought that he would be able to do the work because his legs are “strong” he thinks.

After working for 3-4 days and earning money which he thinks is excellent (Rs 100 in 3-4 days), Next day he fractured his legs because of a severe accident with a Car in the town. With no money with him, he can.t do any thing but to live with the situation. With his broken legs he was doing some “Wall painting work”.

His family is some how managing to survive in village and waiting for him to come and feed them for several days without any break .

This person is too weak to work now and accidentally fell on ground because of imbalance and broke his one hand too . Frustrated , Now this person cries for hours and finally decides that god has tested his patience for surviving his life and now he cant take it anymore . After that day this person is missing and there is no trace of him .

This is real life story of not just one person but most of the people in poor villages of this country . I had met this person long back some 4-5 yrs ago when he came to my home , He is close relative of a person i know personally .

#Story 2 The Old Lady

“Jeera” .. This may be a kitchen ingredient name for you , but this was a common name for females in poor villages . (Many people are named on vegetables, masalas and fruits in villages). This is a women who is in her 60’s, elder than my Father. She does not know where are her children from last many decades. They ran off from village with the bad companies they had.

She comes from her village 6-7 kms from my home town and washes utensils, cleans rice and wheat etc. or Washes clothes some times .. Any petty work at home “on demand”. She gets Rs.5 per day from each Family. Btw, she works for just 2-3 families anyways.

So on an average she earns Rs.10 per day , some times Rs.15 . Rs.10 is actually good enough to feed her two times, because she has no other expenses other than Food. Transportation is free (She walks up and down daily) and hopefully gets a Saree once in 3-4 years from some family on Diwali or Holi may be).

Her biggest Wish in life is to own a Mobile phone someday , but deep down she knows very well that its not possible in this life. I see her always cheerful and smiling, and some times her level of satisfaction and happiness in life seems to be much more than any average person in this country.

Story 3 #The Rickshaw Wala

When I was in School , I used to go by Rickshaw to school , and my rickshawala was a dark-long beard muslim person (don’t remember his name) who used to yell and shout on every boy and girl every day for whatever we did, even if were 1 min early , he yelled 🙂 .. if we were late by 2 min, he yelled.

I was really scared by this person all my life (my school life) and after I left my home 12 yrs back for further studies, Whenever I go home, I see him pulling rickshaw to same school, same rickshaw (in bad condition), No changes at all … Either he sees me accidentally or I see him accidentally and then This person comes to meet me at home, Our talk generally ends in 3-4 minutes with just a general “Haal-Chal” talk.

Every year he looks 2 yrs older than last year and more weak than earlier. One common sentence every year I hear is that “He is trying to make both ends meet somehow” and “he is not able to pull his Rishshaw these days , But some thing needs to be done to support his Family of 8” .

I was surprised to hear that he had 8 people in family and even more surprised when he told me that this is after his 4-5 sons ran away from Family because of being involved in “Gaanja-Sharaab” (opium-alcohol) activities.

This time, He came to meet me again, His pauses longer this time between the conversation. I realized that he expected some monitory help from me (He expected it every year, but I never understood, I thought he just came for “Haal-chal” talk).

I gave him Rs 100, and I could see tears in his eyes, because it was too much and beyond his expectations. I think he expected not more than Rs 10-20).

I think he will take a small vacation now (for 3-4 days) and rest at home, anyways no work because of Diwali.

———

Conclusion

Most of us earn per day more money than what these people make in a month . Early Investing is key to financial freedom , “Satisfaction and Being Content” is the real key 🙂 . See what you have rather than what is missing and you will be much more happier than ever.

I am telling you these stories so that we understand how good our situation is and we worst situation is literally 100 times much better than the best life these people can ever think of. I hope it hurts less next time your Mutual funds drop by 10%, or your Home Buying is delayed by 1 more year, or you are not able to go for vacations for a year or your “life is miserable”.

Donations

Incase you are too touched by these stories , I would be happy to accept donations and give to these people [mail to [email protected]], You can give donations of as minimum as Rs 50 or Rs 100 .. Even if you are ready to skip a movie or Dinner outing with Family, That much money can provide a months worth of food or some happiness to these families.

Time to do something really nice this Diwali 🙂 .

I am not sure If the first person will be available or not [Family is available], but other two will hopefully be there …

I know all these people personally and most of us living and working in big cities might just hear these kind of stories in news or in newspapers but its very common in small poor villages .

Comments are Welcome, Please share your views on these Real life stories and Let others know What are your ideas on making the situation better.

Key to Excellent Financial Planning is Early Investing

Posted on by Jagoinvestor

Today’s article is my favorite, Today we will see that what is the biggest secret of Generating Long term Wealth.

Most of the people run after choosing great Mutual fund and choosing right policy, but they do not understand the most important element of Investment Planning, which is Early Investing.

In this article we will discuss how important is Early Investing, We will see that what you contribute early in your Life is what matters the most.

early investing

I did some Excel calculations and found out some important Rules you should remember. All the Examples in this articles assumes 12% or 15% CAGR annual return over long term (30+ yrs). Lets see some Important Ideas you should keep in Mind.

If you are reading this article in Email, you wont see important charts and graphs, make sure you visit the blog for this particular post. thanks

The amount you invest does not increase drastically when you cut your Tenure by huge Margin.

What I mean to say here is that if you have a goal of generating a fixed amount at the end of a long period like 30 yrs and If there are two cases

  • Case 1 : You invest amount A per month for 10 yrs and then let it grow for next 20 yrs .
  • Case 2 : You invest amount B per month for all 30 years .

In this case amount A will be too big compared to amount B. It would definitely be more, not by great extent. Lets take an example. If you want to generate a corpus of 2 crores in 30 yrs and you assume a return of 12% annually.

You need to invest Rs.5666 per month to achieve this target if you can invest for whole 30 yrs. But what if you want to invest only for 20 yrs or 15 yrs? In that case how much money you need to invest per month?

The answer is Rs.6065 (20 yrs) and Rs.6611 (15 yrs). So you can see that the monthly contribution required to meet the same goal does not increase drastically even if you reduce the tenure by 10 or 15 yrs. See the chart below (Click to Enlarge)

The Tenure and amount required are :

30 yrs : 5666
25 yrs : 5801
20 yrs : 6065
15 yrs : 6611
10 yrs : 7903

In the above chart you can see how “Monthly Contribution Required” increase at very small amount if you want to save the investing years later in your Life . Download this Monthly Contribution Calculator to calculate how much you need to invest monthly for your Financial Goals.

Even if you cut your Contribution at the end of the Tenure, It wont affect the final Corpus Drastically.

What this means is that If you want to invest for long term and in case you are not able to invest for many years at the end, the final amount generated will not be drastically less .. The difference will not be worth a concern.

Lets see an example, If you want to invest Rs.4000 per month for next 30 yrs (retirement amount, see 6 steps of Retirement Planning) and you assume 15% annual CAGR return, you would be able to generate a corpus would be 2.8 crores, But in case you just invest for 20 yrs and don’t invest for rest 10 yrs, in that case your corpus will still be 2.69 crores, 96% of the original amount.

If you invest for 10 yrs and don’t do anything for 20 yrs, still you will be left with 2.19 crores. You can see that how your corpus is not getting affected a lot because of laziness in investing.

If you are successful in early investing, your 90% job is done, even if you are not able to invest money in later years, your final amount will not be affected a lot.

See the chart Below (Click to Enlarge). See this Video to understand the CAGR or Annuity Calculation, Or see this Article if you are on Slow Bandwidth.


If you see the chart above, you can clearly see that in the first 15 yrs, the total corpus at the end does not decrease with great rate. Its more than 2 crores even if you miss 22 yrs (thats more than 70% of total tenure).

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Investments Done in Initial years are the main chunk of your Final Corpus

What this means is that what you in the start has major chunk in your final corpus , the money you invest at the end generally has no major contribution because the money compounding has done its work on the money you invested in the start , not end .

See the chart below . .

The time frame of this example is 30 yrs investment with assumption of 12% annual CAGR return. You can see two kind of lines here. Blue Line shows contribution of a particular year in the final corpus and Red line shows cumulative share of years till then in the final corpus.

If you see the chart and concentrate on 6th yr, you will realize that what ever you invested till 6th yrs contributes to 52% share of your Final corpus which means that if you stop at 6th year, you will still be able to make 52% of original amount.


You can also see that last 12 yrs contribution helps in 10% of final corpus, this we saw in the first chart itself.

So at the end, lets see some numerical facts which will help us understand power of early investing.

  • “Investing 1500 per month for 10 yrs and letting it grow for next 20 yrs” will generate more than “Investing 1000 per month for 30 yrs” @12% return.
  • “If your Original time frame was 30 yrs and later you want to cut your Tenure by 50% , you corpus will decrease just by 14%” @12% return .
  • A : “Investing 5000 per month for 30 yrs” B : “Investing 6,000 per month for 15 yrs and do nothing for next 15 yrs” C : “Investing 11,000 per month for just 5 yrs and do nothing for next 25 yrs” Here, C will make 1.95 crores.

If you are a young person below 25 and you have 35 yrs in your hand and want to make 5 crores, If you start right now, you will have to invest just Rs.3,400 per month, But if you are later by 10 yrs, then you will have to invest more than 15,000 per month to achieve same target.

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Conclusion

Start Early, The secret of Sound Financial Planning is Early Investing, not making excellent return or choosing great funds or buying multibagger stocks. If you can take little pain and invest more money now, then better do it, It will save you from lot of trouble later.

Please spend a minute to take these polls

Please put your comment and let me know how was the article and if you liked it? What do you think that early investing is not the most important element of Investment planning, if not, what other thing do you think is the Key 🙂

Why is Decision Making so Hard in Financial world?

Posted on by Jagoinvestor

“Secret of Happiness is low expectations” In this article we will discuss why it is so hard for us to make financial decisions and what factors play role in delaying our decisions?

When we have to make a decision, there are lot of choices offered to us, which makes our life difficult and hence it results in delayed decision. We will see how can we change our thinking and help ourselves to make our decision making a smoother and better process.

We will also have a look at some examples which will make reading this article better for you.

What makes Decision Making Hard?

The top most reason why we are unable to answer decision making questions is having Lots of Choices. As per Barry Schwartz in his excellent talk


When we want to choose a particular product from a group of products, it’s hard to decide because of more choices that we are exposed to. More choices means more data to process and more data to process means less chances of finding the best product that is suitable for our needs.

What is the reason Behind it?

As per Decision Theory: We want to make the best and accurate decision given a lot of choices, because we don’t want to be guilty later when we find that we missed out on the best choice. This is called “Opportunity Cost”. We don’t want to blame ourselves for not picking up the best choice. We often try to avoid that regret which can arise later because of the outcome.

The point to note here is that many a times, just because of the comparison we make, the satisfaction level goes down even though the results are good. Haven’t you felt bad when you saw giving 15% return and others gave an average of 23-24%. But you didn’t ever appreciate the fact that 15% in a year is a good return and you should be happy about it.

Next time while choosing the fund to invest in, you make sure that you buy something which is among the top performers. Watch this Video on how to choose a good mutual fund

Example

One of the example is my close friend Chetan Chouhan from Pune. I advised him Sundaram Tax and SBI magnum Tax saver as tax saver funds in early May 2009 he shouted on me after seeing my post on Best Mutual Funds for year 2009, because of the “Opportunity Cost”.

He wanted the “best” fund and now compares the list with what he has currently. He should appreciate that what he has is a good fund and can fulfill his requirement… One should try to get the best fund and maximize his returns but if you give your mind and soul for it .. its just not worth it.

What exactly is the Confusion now a days:

  • Which is the best mutual fund at this moment?
  • Which is the right ULIP policy for my Child?
  • Which Bank will provide me best Home Loan that suits me?
  • Which Bank has the best FD rates for my profile?
  • Which Term Insurance is best?
  • Which Shares should I invest in so that I get maximum return?

Check this ebook if you are new to Stock Market

Some Statistics of Indian Financial World:

  • 3800 Mutual funds in India (Approx Data as on 31st July 2009): Source
  • 36 Different Mutual Funds AMC in India: Source
  • 86 Banks in India (Public , Private and Co-operatives, Small , Big): Source
  • 22 Life Insurance and 21 Non-Life Insurance Companies (most of them are common to both Category): Source
  • 1319 companies registered in NSE [Source] and more than 10,000 Companies listed with BSE
  • There are 100’s of Insurance Policies and ULIPs from Different Insurance Providers
  • 293 Insurance Brokers: Source
  • 59 Commodities for Future Trading on MCX: Source

A Different World!!

Now with so many choices and lucrative offers, it’s too hard for us to choose the best one. Even in my list of Best Equity Funds, you will find it very difficult to choose 1 or 2 funds to invest in. But I gave you just 2 funds and asked you to choose 1 fund. It would be so easy for you because less the choices higher the chances that your choice will be a good one.

Just Imagine a world where there were 2 Term Insurance products, 3 ULIPS, 5 type of Mutual funds and 3 Banks providing Home Loans. What a wonderful world it would have been! I am sure everybody would have a desire of that kind of Environment.

Then we will have very less information to process and there will be less changes of Regret and high chances of Satisfaction.

Do we delay our decisions?

Ask yourself…

  1. Are you not delaying your Investments just because you are not able to figure out which is the best Mututal funds or ULIP?
  2. Are you not trying to find the least rate of interest for your Home loan so that you don’t regret later that you didn’t get the best deal?
  3. Don’t you want to stop your existing mutual funds because now there are other funds who are top ranked and more talked about on television and magazines, even though your Fund returns are very good and it has potential to achieve your goals?
  4. Are you not confused on which stock will move higher and may be don’t invest at all?

There are so many websites, newspapers, blogs out there giving reviews, recommendations about products that a common person’s mindset is now totally confused because of all this. In case you really think you want take your decisions, you should consider Hiring a financial planner?

Is common person really confused or Am I talking Nonsense?

At the time of writing this post at 1:30 in morning… Here are the poll results with 97 votes which I conducted over last 3-4 days and here are the results. 72% people think that “Having lot of Choices in Mutual funds and Insurance Policies does not make “decision making” easier?

In case you are one of the person who voted for YES or NO please leave your comment and let every one know what was the reason for your Vote.


What is the Solution for this Problem?

How to made a decision making process an easy process? It can be to some extent solved using these ideas.

Change your Focus

By this I mean that we are here for achieving our financial goals comfortably, without compromising our family future and smoothly without much tension. That’s the real goal of Financial planning. Once your mindset is set like this, you will automatically not run behind the “best” funds.

What you will try to do is to find out a good product which suits you, just stick to it.

Filter out the Bad policies

Choosing the best product is not an easy task and not worth too. The easy thing would be to filter out the bad products which is easy to do! So in mutual funds you already get rankings and lists of top 10 or top 5 funds or Best policies from ULIPs or good Home loan from a Bank.

I would say they are worth a look and finally you should decide soon enough on one of them but for this you must have shifted your focus from choosing “best” product to “a suitable” product. People who want to Buy good mutual funds for long term can Choose any one of mutual funds listed in my article on Best Equity funds for year 2009.

Think Less and concentrate more on Fundamentals

There are more Important things than Best timing and Best product which you have to concentrate on. One of them is Consistency in your Investing and your Plan, your Asset allocation, your Diversification. Once you concentrate on this and forget all other materialistic things, it would be a more peaceful activity to manage your Finances.

Conclusion

So we can say finally that it was never like this before. Now a days we have too many things to choose for which has made like worse than even. Hundreds of products do exactly same thing but they all claims to be better than another. We have to narrow down our choices and choose any one of them and not try to hunt for that exactly best product for our self.

Readers, please share your experience of being in a situation where you had to think a lot before making a decision or had to delay your decision. What are your suggestions on this problem? Please post comment.

Reality of Financial Planning – Knowledge and Perception

Posted on by Jagoinvestor

Sometime back, I had a Financial Planning Survey on “Where do you place your self on understanding and knowledge of Personal finance and Financial Planning”.

In total 96 people participated in the poll. Let’s see how the result compares overall. What were the results and what is the reality and what reasons are connected for this behaviour.

financial planning example

Comparison of Data

Let us first look at the results. In the above two pie charts you can see that Most of the people placed themselves in “Much above the average” and “Above Average” Category. That is 60% of total participants and only 40% people placed themselves “Below average” or “No Knowledge at all”.

From my experience, understanding and logic, majority of people are Below average in Financial Planning Advice. I think it’s around 80% and only 20% will be above average with a handful really way above the average. A huge chunk has to be below average but most of them have put themselves about as ‘Average’.

What is the Reason for this?

  • overconfidence and overestimation of their knowledge. For example they will argue about why not to take Term Insurance but they dont know that they are wrong
  • No idea about where others belong in the category
  • They underestimate the process of Financial Planning, they think that they can do it well

There can be other reasons as well but these are the top reasons.

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What is the Effect or Result of this Thinking?

  • Most of the people live in the belief that Financial Planning is something they can do themselves without any profession help and hence mess it up at the end. They do not understand the Goal of Financial Planning
  • It causes delay in there Financial Planning and hence the situation becomes worse. They don’t get better “financial planning advice” because of this. They don’t understand how to figure out if a Financial Product suits them or not

Basically its a comparison between “Thinking” Vs “Reality”. I must admit that this blog is getting a lot of readers who still need to learn a lot to manage their Personal finance in a better way. Read “Do you need a Financial Planner ?”

Question: What do you think about this post, why do you think most of the people ahead of others? Is it Reality or just a sense of disagreement that you are not ahead of others.

What is the goal of Financial Planning

Posted on by Jagoinvestor

We talk about Financial planning on this Blog. Today let’s see in this article what is the goal of Financial Planning? More importantly what Financial planning is not!!

Most of the people think that Financial Planning is about getting great returns and about Finding the best Insurance for yourself and about having better than average knowledge about Finance and Investments. But in reality they are small components of Financial planning and the core of it is something else.

financial planning

Why do we come to this World?

Let us answer some basic questions in life. Why are we in this world and what is our life’s Objective ? Why are we working hard with the jobs we have , For a moment just ask yourself , why are you here on this blog?

  • Is your sole objective or goal in life is to Make a lot of Money?
  • Is your purpose in Life is to choose the “best” mutual fund , so that you don’t miss that 30% return next year , and you don’t want to compromise with just 26-27% return which other mutual fund can also give?
  • Is your Purpose in life is to save 10,000 (not more than 3-4% of your Annual salary) by not buying Term Insurance to cover the risk of your Family?
  • Why do people ask me which Stock will go high in next week and they should but it.

At the end, Ask your self what is the top fundamental requirement in your Life, What do you want from your life, I will answer it for you if you are confused.

  • We are here to be lead a Happy and Healthy Life .
  • We are here to be with our loved ones and share little moments of life with them
  • We are here to fulfill our Basic dreams in Life first
  • We are here to fulfill out desires in life after our Basic Requirements are met
  • We are here to make sure that our children get Good Education and we are able to provide them whatever they want comfortably

If that is the case, the right Question to ask our self is “How should I make the most of my situation and Plan for things which will help me achieve my Financial goals easily and comfortably, without risking too much ”

What is Financial Planning?

So this is how I will define Financial planning

Financial Planning is deciding a road map for you self and deciding in advance how will you invest your money which helps you achieve your Financial Goals in life comfortably.

Financial Planing will give you a Path on which you just have to walk overtime because you have decided and planned everything in advance . Financial Planning is about Consistency. It’s about having a vision. It’s about promise to yourself that you will follow the plan with discipline.

Its not about getting 30% or 40%, its about getting X% which will help you achieve your goals easy enough without compromising and exposing you to unnecessary risk.

Learn What are 8 steps of Financial Planning?

Lets take a scenario : If you need to save 10 lacs for your Daughter Education in 20 yrs. You have two choices:

Choice 1: You can Invest Rs 2,000 every month through SIP in some good mutual funds which has good track record over long term. You can try PPF + Equtiy Diversified funds OR you can try Mix of Balanced Funds if you are not big risk taker 🙂 .

This this case , you have to do just follow the plan , Just invest 2k every month consistently and review your Fund performance every year once [See this calculator to calculate it for your goals]. If they start getting bad , shift to some other good fund.

Just imagine how easy and comfortable this situation is! If you can little more risk you can do that but not too much.

Choice 2: You are ready to invest 2k per month but here you want the best mutual fund- one which gives 25% or may be 30% return. Now the point is, may be this Mutual fund returns you a lot of money, may be more than what you wanted BUT, it also may go up and down too much in short term or long term because of the risk it exposes you to.

Are u ready to take that risk of not meeting your financial goal? I would also agree that the chances of that case it too small but why to take even that risk when you have the other way where you can achieve it without any risk?

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Short term goals

People concentrate too much on Buying the Excellent Mutual Fund? May be people do not understand meaning of “Best Mutual Fund”.

So let me declare what is meant by best Mutual fund: the best mutual fund for you is the Fund which suits your requirement and has ability to help you achieve your Financial Goals without risking your money! Some days ago I posted about “Best Mutual Fund for 2009”, now does it mean, that you go and buy it just because their returns are too high? NOT at all!!

All these mutual funds gave negative 40-50% return in 2007-2008. What if you had 1 lakh today and wanted to save that money for your Child Education which is payable in next 1 yr , suppose you need to pay 1 lakh only after 1 yr or may be 1.05 lacs.

In this case your “requirement” is Safety and not growth of your money. Will you go and invest in those mutual fund for the reason that they are excellent funds.

Will you not take into consideration that if they go down your 1 lakh will go down to 50-60k and in that case it does not suit your requirement. You have to understand that they are linked to Markets and may not suit your requirement.

Long Term Goals

If you are planning for your Retirement and saving a decent amount of money every month then all you need is return that is close to 12-15% CAGR [Learn What is CAGR], which is achievable in long term if you just invest in mutual funds through SIPs.

In that case how does it matter if you invest in “Rank 1” Mutual fund or “Rank 5” mutual fund? I am not saying that you should not try to find good Mutual funds but shift your Focus from “buying the best mutual fund” to “Buying a Mutual fund which will help me achieve my goals”.

Conclusion

I would conclude this article by repeating the same point that Financial Planning is not at all about getting great returns or beating your friend’s portfolio performance or doing better than average.

It’s a personal thing and totally relevant to you and to your needs and your Financial Goals. Its about having a predetermined plan or strategy to make use of whatever money you have in a hassle free way.

Getting great returns or doing just better than average is not a very significant part of Financial Planning.

I hope all your doubts must have cleared by now. If you still have any then leave your query in our comment section.

How much Risk you should Take ?

Posted on by Jagoinvestor

Are you a High Risk taker? In this post we will talk about risk-taking in your Investments, be it share investing or mutual funds investing or just any kind of investing. Taking low risk can be equally disastrous as taking high risk. So in this article we will discuss how much risk you must take as an investor.

Financial Goals vs Risk you take

Firstly, we have to understand what is Risk-appetite? As retail investors we don’t understand the important issues attached with risk-taking.  We blindly invest in any investment product without considering if it suits our risk- appetite or not!

We have financial goals which we want to achieve in a defined time life “Buying a Rs 5 lac car in next 4 yrs” OR “Generate 20 lacs for my daughter education in next 15 yrs” and we figure out how much we should invest every month or year to meet our goals.

Depending on our Greed or Fear, we choose the products to invest in. Some choose Mutual funds, some choose Shares directly where as others may choose PPF or Bank Fixed deposits (Read how to find out Best Fixed Deposit for you). So it may happen that we may take risk which does not suit us.

This risk can either be over-risk or under-risk. Both are equally bad for us. You should read How Equity and Debt provides returns.

Problem with Over-Risk

Taking Risk that is much more than we can afford or take may lead to a situation where we are unable to meet our financial objective. This is a very bad situation. We in hope of getting better than “required” returns take unnecessary risks and increase our chances to meet failure.

Failure is okay but you should be ready for it. Taking higher than “required risk” can lead to this kind of situation. These issues happen because most of the times investors forget the first step of Financial Planning.

Example

Ajay wants to generate 5 lacs in 5 yrs for his Daughter Education. He can invest around Rs 6,000 per month (See this video presentation to understand how its calculated). To meet his goal he needs to get around 12% return annually. There are different ways of achieving this like

But what if he decides to invest his money in Sectoral Funds like Real Estate or Infrastructure or invests directly in Stocks without much idea of how things work?

This can either make him Much more than 5 lacs, may be 10 or 15 lacs OR it can be disastrous and he can lose his money and may not be able to generate even 3-4 lacs depending on the circumstances. Now this goal was something very important. He can not take risk for his daughter Education.

If it were a car or a vacation goal, I would have said “ok – go ahead”. But Education is a Need of life. He has to understand Difference between Needs and Wants . He has to understand where to take more risk and where to take less.

Problem with Under-Risk

Just like Over-risk, taking less risk has its own issues. Most of the people who invest in Endowment Plans or Bank FD for years suffer from this virus. If you take very low risk, you may not be able to achieve your goals at the first place. Read Why Endowment plans are bad to invest in.

Example

Robert wants to generate Rs 1 Crore for his retirement. He has 30 yrs and He can invest around Rs 2,000 for this in Mutual funds with SIP and this should be possible with Patience. He can take moderate risk but he thinks that equity markets are too risky and its something he should be away from.

He is a fan for Endowment plans and traditional Bank Deposits so he invests in these two instruments. He generates Rs 15 lacs from his Fixed deposits (before tax) and Rs 13-14 Lacs from Endowments plan with his 1,000 investments in each of them.

So at the end he has total of less than 30 lacs as Retirement Corpus. He has 30% of what he needs at the end. What are the issues here? He has to Compromise with the life Style and he cant enjoy his Post-work life as he wanted because of severe financial pressure. Because of fear and reluctance of taking “required” risk he has done un-repairable damage to his financial life.


Conclusion

Its very important to take the investments with our risk-capacity taking high risk can lead to situation when our returns are less than expected. Because of greed we sometimes take extra risk and only concentrate on the rosy picture and forget the part which looks bad. Its an Irony but most of the people think that somehow there are less chances of bad things happening to them.

The same way, taking too low risk can lead to under performance in returns and hence after you factor in Inflation and taxes you may be in a financially fatal situation you might have lost all your life believing that you are gaining (like in the example above).

Hence, you must take risk which is required for meeting your financial goals and also which you can take if things go wrong. Taking Over-risk is same as taking Low-risk. The best way to find if a Product Suits your Needs or Not is to Find the GFactor of that Financial Product.

Q. What do you think about “Required Risk” How should an investor estimate how much risk one should take?

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Can you save 10% of your salary every month?

Posted on by Jagoinvestor

Answer this question Honestly. Don’t rush, think about it and then answer this very important question. If you get salary cut of 10% and you have to live with 90% of your salary; how will it affect you? In this article we will see some important insights on spending habit and psychological issues.

Most of the people do not save anything at the end of the month and the biggest reason is that they are not left with anything (as they say). “Supply creates its own demand”.

save money

This applies to Personal spending also. When we have money in our hand we will come up with million reasons as to why we have expenses and why we can’t do with any money less than that.

Answer these questions:

If you get a salary cut by 10%, will you be able to

– Pay your Rent
– Meet all the household expenses
– Pay your children fees
– Spend on all the important things like Entertainment, eating out, occasional
splurging etc etc….

I can bet that most of you will have answer in YES!!

If people control and prioritize their spending then it’s totally possible to live in 90% of salary. Just close your eyes and imagine a situation that you are now earning just 90% of your regular salary. Small savings can make up large chunk of investments.

If you try to answer the above questions then the answer would be a YES for almost all of you. There can be some exceptions but i am talking about majority.

For some people they may require cutting down on totally useless stuff and reducing expenses on things which can/should be avoided. Some of the examples are

  • If you see go out 5-6 times a month, reduce it to 3-4
  • If you see 5 movies a month, reduce it to 4
  • Anything where you can do with less spending

Does saving 10% means that you start living a Frugal life?

Please understand that saving money does not mean depriving yourself. The only thing I’m saying is that we Indians especially in Metro cities have slowly started going the American Way, i.e. Spending more than what we earn. From last couple of years, we are using to much of credit cards in the way we shouldn’t be!

We are a nation which saves but do not invest properly and now we Indians have started spending like never before. Spending is good, spending on useless stuff or stuff we can do without can be like cancer. It will not hurt you immediately, but kill you some day.

Now after you have realized that we can really live with 90% of our salary, what can we do with it. SAVE IT!! what else?

I believe (and I can prove) that saving 10% of your salary is only what you need to do to achieve all your goals in Future, provided you Start Early and Have realistic goals.

A person who is 25 yrs old and earning 40,000 per month if saves 10% will his retirement(60 yrs) would be having anywhere from 2.3 crores to 6 crores if he earns anywhere from 12%-16% in long term which is totally acceptable. See how to calculate this in this video.

What to do?

Next time you get your salary, take 10% out of it and deposit it in some other bank account. Just try to see if you can do with 90% of your salary. I bet you can do it. Saving 10% of your salary can have drastic effect on your investments. You can create nice wealth using Equity in long term.

One of the readers Ramjee comment is worth notice. Please see his comment.

That was on the bulls eye. A little bit of decrease will not effect lifestyle much, but has a lasting impact on your wealth. I have an automated schedule put to transfer 15% of my salary (a fixed amount every month, which is revised if sal.changes) to another account. At end of 6 months it feels good to see the lump sum which can go in for further investments. “

What he did is worth appreciation. I hope people learn from him.

Conclusion

We don’t save because we think we can’t save. Whereas if you try its totally possible. Just to try do this next month. When you get your salary, take 10% out of it and deposit it in some other account and try to live with 90% of your salary, see what all your are missing and if you are facing some difficulty or not.

To see more tips on savings and spending, you can refer to Ramit Sethi’s blog.