What we are earning for? Why do we want to save? Why do we need our money to grow? All these and many such kind of questions don’t need any answer. Obviously, we are earning for ourselves and our family. We want to save for rainy days, to provide the best education to our children. We want money to grow so that we can have a healthy and comfortable lifestyle even after retirement and should not become dependent on our kids. Or if I may say, in financial planning terms, we all want to save so that we can achieve our goals comfortably.
Yes the target of every person is same…thought the approach may be different. Some want to work in a structured format and follow a systematic way to achieve goals while others are opportunistic in their approach and do a lot of things haphazardly to make the money work for them. At the end both approaches will lead you to the same result. But in the former case it was in a more planned and comfortable way. In the latter approach your basic goal is growth of money. You feel that money is the only solution to every problem and thus for multiplying it you need to take many inadvisable calls, shifting money between asset classes and products, trying to move along with trends etc. And by doing this you invite uncalled for risk, in your portfolio which sometimes become difficult to tackle and you end up losing more than gaining.
To make your money grow and move it in the right direction you need to have a proper focus on what you want and how you want to achieve it. To stay focused on your goal. It’s important to understand three important aspects:
- Fixing goals properly
- Understanding of asset classes
- Profit booking vs. Asset allocation
1. Fixing goals properly:
There has to be a reason for saving. And that reason is called “Goal”. No financial plan can be designed if you don’t have any goal in mind. And that goal has to be monetarily defined so that some arrangements can be made in finances and the optimum way to achieve that goal can be figured out. All of us start with a particular goal like children’s education, retirement etc., purchase the best child plans, pension plans, mutual funds etc. but after some years are always looking for opportunity to withdraw the same. The reasons are many like “Someone told us that this is not the good plan to invest in” or “I need the money to purchase a new car” or “I need finance for my vacation” etc. One of my clients has started investing in mutual funds to save for his child’s higher education abroad. After 3 years, he withdrew all the funds and purchased a car. On asking for the reason, he said “My child is not sharp enough to be sent abroad, I think he’ll do simple graduation from India only.” This kind of stupid reasons display your inability to stay focused. You always get carried away with your desires and forget about your actual need and thus to get instant gratification, you always overlook your long term responsibilities. That doesn’t mean my client will not send his child abroad. He definitely will and I am sure he will have to take education loan at that time. When you are saving, you need to be focused in your approach. You have to define your goals properly and have to work towards achieving that. One very exciting tools which is used by financial planners to help you fix your goals is “Goal Visualization”. Before giving a monetary figure to a goal they always ask clients to visualize the goal as if they are actually living in it. To do it you just have to ask yourself some basic questions like “How would you want your retired life to be?” What hobbies you would like to pursue after retirement”? , “Where do you want your child to study in?” “what kind of house you would love to live in?” After visualizing you also have to answer that “How important these things are for you” and “what goals really excites you to start working immediately and what you can do to realize your dreams. This will give you a clear picture as to what actually you want and inspire you to work towards it.
2.Understand asset classes:
Wherever you want to start savings… it leads you to one of the four asset classes and these are Equity, Debt, Gold and Real estate. Products name may be different but style of working and structure will be same. So by getting out of ULIPs and investing in mutual funds might not solve your need of diversification and reduction of risk and vice versa. Just moving along with trends will lead you into trouble someday. In 2010, after looking at stock market rally of 2009, every second person wanted to enter stock market. After staying there for a year when they found that movement in prices of stocks have slowed but gold prices are surging, everyone is searching for gold investment options. Manufacturing companies take advantage of your ignorance; by launching Guaranteed NAV products or giving you option to invest all your equity savings in Gold etc. You just have to understand the asset classes and different features associated with it like risk, return, liquidity etc. While selecting a particular product you should be sure of the investment objective of the product and your ultimate goal. Both of these should match.
3. Profit booking vs. Asset allocation:
If you have really worked on the above two steps then you will definitely understand the importance of staying long and short. Selecting a particular product or asset for a particular goal should be decided before you start investing in it and if you have started then don’t look back. Stick to your plan. Profit booking is the biggest blunder people make as it hinders the process of compounding. But yes as we always say to allocate your investments into different asset classes and that allocation depends on your overall profile, your long and short term goals and risk appetite. Your asset allocation has to be rebalanced regularly so that you should not be over board on any one particular asset.
Staying focused is very important in every field of life. And same is with investments. There’s very popular saying “When you don’t know where to go, any road will do”. But when you know your destination, and what mode transport to take it will help you reach conveniently. So stay on board and enjoy the journey.