Notes to my younger self - 4

Published On: 24-Mar-2020

Having secured the fundamentals it is time to ensure that the hard work you put in to earn your money does not go wasted and you make your money work as hard as well.

Building a comfortable path

When you start on the path to saving money you keep on getting introduced to products and you start on the path to collect financial furniture. Looking back now I realise I bought stuff I did not need or was redundant. The post office saving scheme till the time it was offering 8.5% was good way to save money under small saving scheme. However, buying multiple money back insurance policies etc. was best avoidable. I also lost out on early years because I always thought that you had to have some corpus to start investing. In spite of having studied about stock markets and equity, stayed away from the asset class because of stories heard in the household while growing up on money being lost etc. 

So here is what one must do and learn as you go along.

Fast start  

The sooner you start the more you make. One could have started with as low as Rs 500 in SIP’s and built it slowly but did not realize the opportunity loss.  The time value of money should be internalized and if we learn this then we will never procrastinate in life. 

For the first 10 year of my life my salary would have increased 20X, but I did not start on this investment journey as I always thought this was meant for people who had a corpus. If I had invested Rs 1000/- every month and increased or step up by 10% every year post the increment. In 10 years’, time at 9% return the corpus would be Rs 284723/- against an investment of Rs 191249/- a gain of Rs 93474.  You can do this calculation yourself and see the power of compounding 

https://www.utimf.com/mutual-fund-calculator/sip-calculator

So start your journey today.  Start in something as simple as an index fund till the time you unravel the complexity of choices. 

Fill it, shut it , forget it  - No , fortify periodically

So, when I started this journey after much egging, I completely became passive towards it unless someone pushed me to top up or increase the contribution equal to or more than my annual contribution. In addition to that tried saving 30% of my annual bonus for investing as well.

Now imagine in the above example if I saved Rs 5000/- instead of Rs 1000/- per month for the same period and same rate of return. The outcome 

 Its simple the more you save the more you make.  

So, top up religiously every year, add that bit of bonus as well. 

Diversification

Diversify means “to include different types of things.  The idea for diversification is to manage Systematic risk which can include interest rate risk, inflation risk, currency risk, liquidity risk, country risk, and socio-political risk. In financial landscape it means essentially recognising the role of different types of assets or products and then figuring out what proportion to buy and in which sequence. Diversification is mentioned in Shakespeare (Merchant of Venice)  

My ventures are not in one bottom trusted,

Nor to one place; nor is my whole estate

Upon the fortune of this present year:

Therefore, my merchandise makes me not sad

Diversification is holding investments which will react differently to the same market or economic event. It essentially means “Not all your eggs in one basket “.

In the quote above from Merchant of Venice multiple risks are addressed when he refers to diversification.  Essentially the benefits of the diversification are as follows 

  1. Minimising risk of loss - if all the money was in real estate or gold or stocks then my outcome is strongly linked to that asset class . If it is not doing well and I require that money, then I am doomed 

  2. Preserving capital – Depending on the life stage or a goal I also want surety or assurance of capital so diversification can help towards that as well 

  3. Generating returns. – lowering of volatility in addition to ensure that some part of the money is growing can be achieved by diversification 

I unintentionally diversified as I started saving in multiple  pockets -bought Gold ( physical coins on every occasion like birthday, etc – though now have shifted to Gold ETF) , put money in post office savings scheme ,  had been forced to buy some money back/ endowment policy ( thankfully did not buy more) before I started looking at mutual funds . 

Asset allocation 

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance (how much risk you're comfortable taking to achieve that growth and, crucially, how much growth you need to achieve to meet your financial goals,  how much you can afford to realistically lose if the markets fall) and investment horizon(how much time you have to invest)

To properly diversify, you should start with the four main asset classes: cash, bonds, equities and property. 

But even then, it's important to diversify not only between asset classes, but also within asset classes. Most asset allocation models fall somewhere between four objectives: preservation of capital, income, balanced, or growth.

Well, all this is fine but then what’s the reason for changing asset allocation. You might have a goal coming up and if the markets are choppy at that moment you want to reduce the risk and move to relatively fewer volatile assets. This is what people also do when they approach retirement or their kids turning 18 (when they are planning for college funding).

Now that challenging part is execution of the change. When you want to change asset allocation (rebalancing as it is called) how do you actually do that.

  1. You can sell off investments from over-weighted asset categories and use the proceeds to purchase investments for under-weighted asset categories.

  2. You can purchase new investments for under-weighted asset categories.

  3. If you are making continuous contributions to the portfolio, you can alter your contributions so that more investments go to under-weighted asset categories until your portfolio is back into balance.

But hey before one becomes enthusiastic about this and before you rebalance your portfolio, you should consider whether the method of rebalancing you decide to use will trigger transaction fees or tax consequences. Your financial professional or tax adviser can help you identify ways that you can minimize these potential costs. Here is again a reason why #talktoyourfinancialadvisor helps. Our day jobs prevent us from being familiar with all the rules of the land, while that should be our endeavour we should seek help whenever we need it . 

Discover, Uncover your mental models

Now, you might ask, how is this in any way related to investments or wealth creation. Well fundamentally be it investments or relationships, all are outcomes of the choices we make, because of the mental models we have and the unconscious biases. An interesting and detailed article on this is https://www.safalniveshak.com/mental-models/.  It is essential as we head on this lifelong journey, we make time to understand ourselves better. At the end of all this a certain inactivity, inertia helps in building wealth. Cutting out noise and learning to be detached is an art and a skill which must be honed over a period of time.

So happy investing and wish you all the very best on your journey, remember you have time on your side.

If you have missed reading  “Notes to my younger self -1”  or  “Notes to my younger self -2” or  “Notes to my younger self -3” click on the link  "Notes to my younger self -1 / Notes to my younger self -2 / Notes to my younger self -3"

Author Bio

Gaurav Suri
Gaurav Suri provides leadership to the marketing and communication functions ( which includes Brand , Channel , product marketing and Investor education initiatives) along with Business Intelligence unit which serves to build data led decision making in the firm & Digital Eco System (which includes all the mobile , web assets and contact centre) for creating a digital business model for UTI Asset Management Company Ltd. He was a member of the AMFI financial literacy committee and leading communication development on "MF Sahi hai " campaign.His previous assignment was as Director Marketing and Product Development, Metlife. Having worked with a variety of companies such as FMCG Majors (Britannia Industries Limited-Danone group and Perfetti Van Melle) and the Insurance industry, he has over 24Years of diverse experience. After completing his Bachelor of Engineering (Mechanical} from Regional Engineering College, Bhopal ( MANIT) he went on to earn his MBA from XLRI, Jamshedpur.