We all work all our lives to earn money. Finances are important, but not really well understood. Investors have many myths surrounding money due to which they make mistakes that take them away from the financial freedom that they crave for.
We have heard of various strategies to accumulate wealth. We have heard of various investment strategies to grow wealth.
There is one more way to be financially well off. It is to simply avoid committing blunders with ones finances.
Here are some, which one should avoid.
Leveraging & creating a property stack - There are many who believe that there are rich pickings in property. What’s more, one gets loans at low rates, which one may leverage and create enormous wealth, is the thinking. We have seen people buying two, three or more properties all bought using generous amounts of loans. Many times people get trapped with these when properties get stuck due to litigation, because the builder has stopped work, projects get delayed etc. At these times, the EMI goes on though the projects don’t yield any returns, as was expected. This creates a no-win situation, where one needs to keep servicing loans without any prospect of getting any returns, for years to come. Those who would like to exit in such situation find that selling it is no walk in the park either as a property which is “stuck” cannot be sold easily and one needs to take a haircut - like Vin Diesel has.
Buying holiday homes, retirement homes - Investing in these don’t yield anything that can be financially called interesting. In the former, one ends up not using the property & still spending a lot of money on upkeep. In the latter, the retirement home gives poor returns throughout & when one retires and wants to move in, it is old & better options are available. Both of these are a grade lemons to be avoided.
Investing in a bunch of insurance policies - People have lots of insurance policies, many times sold by relatives, who are agents. At other times, it’s their bank, wealth manager or other “Financial Advisors” who have piled on insurance policies. Insurance policies are long term contracts which lock a person into it for years, even decades. Many of them are low yielding, often inflexible, not easy to surrender and get out of, provide too little life cover etc. Investing in insurance policies makes many rich - but you are not one of them!
“ Diversifying ” investments - People want to put their money into different products all the time. It is assumed that risk mitigation happens, if one has put their money in a few dozen products. It adds to complexity & clutter to the portfolio, for the most part. Having a jumbo portfolio makes it unmanageable and makes reviewing all of it, an onerous task. As in most things, less is more. Choosing the right ones that are suitable is the key.
Moving money across the board - There is a conviction that one needs to be constantly on the lookout for assets which are firing up. Investors are constantly looking for winners. Media knows what to serve - they cover the rise of an asset as if it is a live commentary of a 100 metre dash! Investors lap it up and wait in the sidelines, watching the phoenix rise. When the asset ( say gold, real estate, equity, bitcoin etc ) has gone up significantly, they jump in. After that, it goes up more and they put in more & more money. Then it starts waning. Investors want to buy in to do some “bottom fishing & price averaging”. It drops even more. They wait on the sidelines in dismay. After it is clear that they have a lemon in their hands, they call it “long-term investment” ( property investors, owners of Reliance Power shares etc. have said that! ) Moving money across assets is like the snake and ladder board-game. Only that most ladders are illusory & snakes are for real!
Make up for losses/time - We have seen people losing money somewhere coming to us, saying,”I have lost Rs 10 lakh; I want you to now invest in such a way to make those losses up!”. There are others who say they have not done anything right with their finances till then and from that point when they come to an advisor, they would like to make up for lost time! It’s illogical - but the urge to undo past blunders is enticing!
Giving a loan - In every social circle, one would find generous souls who cannot say “No”, when people come ribbing for money! These people know that many of the loans will never come back and what they are giving are actually donations… but they still give. They give as they do not want to appear uncharitable & believe in coming to a friends/ relatives rescue in their hour of need.
Serial borrowers know how to play these people like a stringed instrument and use every trick to ferret out the money. The bonus for them is that such lenders seldom ask their money back! If they do, one sorrowful look will bring full blown remorse on the lender, enough to lend even more again! The right way is to be measured while lending & ideally avoid lending to friends & others. A lender asking his money back, spoils relationships most times! Why lend at all then ?
By just avoiding blunders, one’s finances will be in a decent shape. To really make one’s finances robust, planning & efficient financial management are important. But, first things first - Avoid blunders!
Suresh Sadagopan is a Certified Financial Planner and runs
Ladder7 Financial Advisories, a fee-only financial planning firm.