We are getting busier in our careers. I started in 1996, and every year my responsibilities and work load has been increasing. Competition in business is increasing, and unless we work harder and smarter, we will not be able to stay one step ahead of competition. But I am not really complaining, while my workload has increased, my income and lifestyle has also gone up. But let us pause here for a second, and think about objectives. Why are we working? Because, we want to achieve professional growth, earn recognition, make enough money to meet our current needs and invest to meet our future aspirations. While we may be reasonably happy on the first three counts, many of us would have reasons to be disappointed on the last one. So let us take a step back and rate ourselves on the following questions (these are just some)
- Are there mutual fund schemes in your portfolio, whose last few year performance has been in the lower quartiles?
- Are there stocks in your equity portfolio, which fallen out of favour with the market for the last few years?
- Are you adequately insured, both from a life coverage and retirement planning perspective?
- Is a disproportionate share of your wealth, lying in fixed deposits, earning whatever little interest on a tax adjusted basis? On a inflation adjusted basis, the picture is even more depressing
- Was your real estate purchase an emotional reaction or well a researched decision to earn maximum capital appreciation?
- Are you saving every rupee in taxes, through smarter investment choices?
For those who give themselves an A+ on all or a majority of these questions, congratulations. Not only are you doing a great job with your investments, you are amongst the very few who are doing so well. The majority of us are not doing so well.
Who is to blame? Blaming the market does not serve any purpose, because there is nothing we can do about it. You can definitely blame it on that insurance agent, who sold you a policy which you did not really need. Or you can blame the wealth manager of your bank branch, who sold you an underperforming mutual fund scheme, when you visited the branch to make a fixed deposit. Or you can blame your Chartered Accountant, who does your IT returns every year in a mechanical way, without making any tax saving suggestion. While we may be fully justified in blaming them, at the end of the day it is our own money, and therefore the final accountability lies with us. We do not have enough time to devote to our investments, and that is the reality.
It is not just a question of time, but the quality of some our decisions, with respect to our investments, are also questionable. I find this a little ironical, since in our careers, we often do a great job making money for our companies, be it in terms of growing revenues or saving costs. In this competitive market, it is not easy. When we see an opportunity to grow profits, we diligently put a lot of effort and intelligence to it. Yet the same intelligence is many times not evident when it comes to decision making with respect to our investments.
Let me illustrate with a few examples. In 2004 I received a promotion in my job, on the back of a great year, working successfully on a strategic project in my company. In the same year, the market had corrected sharply after the election results. But I was not strategic enough to move a portion of my savings to equities, during what was a great buying opportunity in a secular bull market. When I did invest in equities, sometime later, the market had appreciated 30 – 40%. Another example of the lack of financial intelligence is how we manage employee stock options. We all know the virtues of diversification, yet many of us who get ESOPs, hold on to them for longer than is required. So in times when our company is not doing well, not only are bonuses lower, but so is the value of our ESOPs. Not a great example of diversification in action. Nor does it prove loyalty to your company, since the company would have accounted for the value of ESOPs in its balance sheet, during the time of the grant. An example of emotive decision making is how we make investments in real estate. I made an investment in a real estate project in 2010, despite poor track record of the developer in timely execution, because my friends were buying into that project. Four years later, I am still awaiting possession.
There are a number of factors that are at play, when it comes to the effectiveness (or rather, lack of it) of decision making with respect to our personal finance. Our own perception of risk, the need of reinforcement from our friends and family, herd mentality, the lag between opportunity identification and execution, lack of objectivity, are among other factors. We need to apply the same processes that have helped us achieve success in our careers to our personal finances as well. Some of these processes are:-
- Analysis of investment options
- Monitoring and Review
It calls for some investment of time, but above all, it calls for a disciplined approach to personal investment financial planning. If we are strapped for time, we can enlist the help of an experienced financial advisor. Your financial advisor can definitely help you with the above processes. But as stated earlier in the article, the ownership of the investments and the decisions thereof, lies with us as investors.
I have spent a considerable amount of time in my career living in the United States. I have noticed that many of my friends and colleagues there have a more structured process of engagement with their financial advisors. They have weekly or monthly meetings scheduled with their financial planners, to review their portfolio performance and go over the entire spectrum of financial management issues including credit card debt, mortgages, 401Ks / retirement plans, tax planning, stock and bond investments. Whether you have one or more financial advisors, it is important you set up a regular engagement process with them, to review your portfolio performance and also the best investment options. Sometimes we put off meeting our financial advisors, based on past experience, when they tried to sell us something we did not need. But if we follow a structured approach, we can dictate the agenda of the meeting and have very productive discussions, just like we have in our offices.
We are working harder than ever of our careers and are making more money than before. With a structured and disciplined approach to financial management, we can ensure that our investments are working just as hard as we are.