When you read that headline, you’re thinking – Damn, Even Deepak’s into headline bait. Maybe I am. Maybe I’m not. But bear with me, this gets better.
I write about markets and money. I celebrate short term trading. I talk about interest rates and inflation and recessions and the RBI. I explain futures, naked options, yield curves, married currencies, straddles, ULips and all sorts of things that sound like they belong in a racy Sidney Sheldon novel.
And perhaps because of that, I get a lot of questions. Many of these are detailed, thought through and excellently organized. They remain the minority.
a) Investors don’t have any time. They’ve figured out they need to invest, and they need to do it now. While they understand they should research more, even that will take time, which brings us to point a) back again. They just want someone to tell them what to do, or even better, do it for them.
(Also read: Thoughts of a Corporate Consultant)
This is why I also get follow up questions like: I bought this ULIP/Stock, how much will it be in 10 years time. (Dude, if I knew, and it could make me money, I wouldn’t be telling you.)
It really isn’t like I don’t care to say it. I just get frustrated because I don’t know where to begin. Should I start with – what were you thinking? Or should I explain, painstakingly, that the future isn’t possible to predict and what you should be doing is to make considered choices, and then you shouldn’t really ask me because even if I did tell you, for free, what are the chances I’d not be picking a number from the air, etc. Or should I brush him off with “Do you have six months of expenses in your emergency savings account yet?”.
No matter what I say, the answer’s going to be – forget all that, takes too much time.Where will this stock be in 10 years?
My answer is the fourth one – the [delete] button. You only fight the battles you care enough about. But no matter what I say, the point hits home – you say anything that takes more than a second to digest, it will be ignored.
b) Investors don’t have the inclination. I love the world of money. I care deeply enough to decode structured products. But, and perhaps this makes the world a better place, everyone does not. Largely, investors remain clueless because they are not interested. They don’t care because they don’t want to care. Like you wouldn’t care about how to do the rueda if you’re not interested in dancing.
Because investors don’t want to know, even moderately complex products will confuse them. Anything beyond “Pay this much, Get back this much, in this much time” is too complex.
Some investors are fooled by the appeal to intelligence. If it sounds complex, it must be good. That agent is a rocket scientist, he just knows. That guy gave me this tip and he made so much money from his last tip that I ignored. These are all signs of insecurity about a field that we all believe should be darn simple – after all, 6th graders can pick stocks – but requires significant effort to understand.
Note that I say they don’t have the inclination – not that they don’t have the skill. Like in the movie Trading Places, I believe there is no “talent” required in the world of money – just enough effort.
c) Everyone is different. Look, I know there’s a formula for investing. It’s just that it’s different for everyone, and even that will change over time. There is no “strategy for 35 year olds with two kids”. Because the first 20 such people you will meet will have very strange but frustratingly different choices. one will have massive debt from a hospital bill after a two-month premature delivery. Another will have been in Infosys since the stock price was measured in paisa, and owns his house, his neighbours house and pretty much all of the street. A third will be trying to deal with a pending divorce settlement, a fourth will be starting up, and a fifth will have enough investments from his past “agent” friends that needs massive rework.
What are you going to say to them? Standard formula = put 80 minus your age into equity? Standard formula = SIP every month?
There is no standard formula. Anyone who claims it, for the mass investing public, is bullshitting himself. But the only way to achieve any layer of scale, for an advisor or a mass agency like a bank, is to tell people the same thing – with minor vertical segregations like age, or gender or strategy.
Evolving a personal financial strategy involves three basic things – Insurance, Equity and Debt. As you grow, you’ll find other options – real estate, angel investing, partially convertible debentures and if you’re a banker, extortion. These are all valid choices, and I really shouldn’t attempt to say what’s right for you.
Given that there is no standard formula, I’m going to give you a standard formula. Here’s the deal:
1) There are really three goals you want to focus on: Emergency, Retirement and Gratification. Emergency is your six month expense in a bank FD, or in Gold or something. Retirement is about what you build for the future you don’t want to think about. And in the end, you need to have fun, get married, buy a car or a house, go on a holiday, give your kids an expensive education or whatever – Gratification. Whatever you do, put stuff into one of the above three brackets; you’ll find it easier to understand how much risk you want to take.
2) Learn about investing, or take a risk. There’s no way to know what works and what does not, even if you’re a genius investor. Everyone takes risks. Investing in anything – a career, a house, a stock, a mutual fund – all carry risk that you can either attempt to learn more about, or decide that you’ll take the risk anyhow. You can only research that much.
But don’t listen to other people as gospel. They have motivations and incentives you do not. They don’t largely care about your making money. If you are going to invest, it’s your decision, don’t blame it on others. Yes, it’s unfair your bank manager sold you insurance instead of a fixed deposit. But it was you that signed it. Remember this: They’re all bastards. Don’t trust anyone.
When you hire a financial advisor, you have no choice but to trust him. That goes for doctors or lawyers too. However, when your plumber insists on gold plated taps, you’re likely to get a little suspicious; given the larger motivations of financial players, you have to do your own homework as well. If you don’t understand (and don’t want to), don’t invest. Investment products are complex. Stocks are complex. Don’t even get me started on bonds. Buying Gold also has risks. If this scares you, or if you can’t deal with the volatility, or if you simply don’t know the math that makes the return clear – say no.
Just buy a fixed deposit and keep renewing it every year. And hope we aren’t Cyprus.
3) Diversify. I don’t tell this to people who know enough about investing; but it makes sense to just put eggs into different baskets when you don’t have time or the enthu. But a little bit of gold, have a few fixed deposits, buy a few stocks. Spread it around.
The problem with this approach is that it can be useless in some cases. Is buying four equity mutual funds diversification? What if they all invested in the same underlying stocks? Do you even have the time to find out?</p >
But apart from that diversification is a busy man’s friend. You don’t worry because you have money stored in different areas – a fall in one will, hopefully, be countered by a rise in another.
Eventually, you’ll make money – and you’ll remember the awesome ones. But to win, you have to play – not watch from the sidelines.
Do not listen to any of this if you’re a seasoned investor. Because, when there is no standard formula…
How does any of this make you truckloads of money? Let me explain in a way only a finance guy can.
If I didn’t tell you all this, you would have been suckered into some random investment product that would have eaten your money away in commissions and sub-standard returns. You would have LOST truckloads of money.
By virtue of the above three points, you have not lost that money. In effect, like fund managers “outperform” the index that lost 10% when they lost only 5%, you have GAINED a truckload of money by not losing it. Hence proved, QED and all that.
Okay, it *was* headline bait.
I’m sorry if I sound arrogant in the above post. It started off meaning to be funny, but somewhere I went on the needlessly offensive. I’ve made my mistakes and I’ll still do them and all of the ‘”advice” is probably meant for me, not you. Thanks for reading anyways.