Who rules your Financial Decisions, Heart or Brain? There is always a dilemma in the minds of many. Let’s look at this story…
A few years back, one of my friends, Ashish, called me to check property prices in Thane. He was keenly interested in buying a house in Thane for his son. His son was in his 1st year of Engineering and had already started preparing for GMAT.
He was a brilliant student in academics and was keenly interested in Joining Top Universities in the USA. I remember, Ashish always wanted his son to pursue MBA and then join a big MNC.
Does it sound like a typical story from many higher Middle-class families? Yes, it is!!
Then why actually, Ashish was buying a House for his son? He replied that it’s a plan for the future as Ashish will have some assets in India, even if he settles abroad. I was confused and asked him, What about your existing 3 BHK residential flat, who’s anyway Ashish is the only legal heir?
The most worrisome part was that there was already a considerable Housing Loan in the current House. But, just as his (present) income allows him to buy a second house as per eligibility criteria, he was planning for the same.
This is a perfect case of an emotional financial decision. By buying that second house in their son’s name, he wanted to express his love and affection. Many things were taken for granted
1. His job will continue and his salary will increase considerably every year.
2. His son will come to India to enjoy his own house quite frequently.
3. He will be able to manage this asset and his son will also manage the house post his demise.
It took a lot of deliberation to convince him against this decision. Fortunately, I could convince him to start SIP in his son’s name equivalent to a loan EMI. His total AUM has already reached a sufficient amount to send his son abroad without taking any further Educational loans.
Yes, there were times, when he panicked in the market crash especially when Nifty had touched the 8000 level in a pandemic. But, he held on to the investments and was happy to see the nifty hovering between 18000 and 19000 in 2022.
So, what we can learn from this? Emotional Financial Decisions could be catastrophic.
Going to USA/Europe tours or buying that latest SUV by raising Personal Loans just because some friend / Relative / Neighbor had done the same. So, you feel guilty and want to go the extra mile to show your love to your family.
Spending Money to show people how much money you have is the fastest way to have less money.
So be careful. Only do luxuries earned from returns on investments & not from breaking them or borrowings. Keep your emotions in check.
But how do we apply all these learnings? For that, continue to Part 2!
Part 2
You should control emotions while taking investment decisions. It is easy to say it, but difficult to implement & put it into practice. But definitely, there are some ways to do it. Let’s discuss this.
1. Turn off Headlines: Stay away from Breaking News. You must be experiencing extra spice put in by the various News channels and their Anchors.
The market has crashed & billions of wealth are eroded or the Market has peaked & soon may correct. Various experts come and give their pessimistic or highly optimistic views (whatever suits them in the market).
But always ask yourself before taking that hasty decision, because your investments are based on facts and not rumors.
Have my goals changed and has my period of investment changed?
What are my Goals and when do I need them to be achieved?
2. Zoom Out: Always look at the larger picture and not short-term fluctuations. When you are certain that your investments give 15% returns over a longer period of 10 to 15 years, then why lose sleep over some correction happening in short term?
Unfortunately, we have developed a habit of checking investment value every day and start worrying.
My request is to check the portfolio only on a quarterly/half-yearly basis and that too for review. Remember, your investments are for a longer period and not for short-term pleasures. Due to data explosion and continuous hammering of easily available information, we tend to take hasty decisions.
3. Diversification: As simple as saying not to put all eggs in one basket. Try to get a risk profile done by a qualified advisor. Align your investments with goals and duration of investments.
Always have a separation between short-term and long-term goals. Differentiate between Responsibility and Good to have. A higher risk for long-term goals and less risk for immediate goals can be always better.
4. AutoInvest: There are very useful ways of having consistent investments. The most popular way is SIP (Systematic Investment Plan), which helps to build a substantial corpus over a longer period.
The magic of compounding plays its role to multiply wealth. If you need regular income, SWP (Systematic Withdrawal plan) is the best option to generate regular cash inflow with original capital still appreciating. This is much more convenient than investing in property and letting it out.
STP (Systematic Transfer Plan) helps to invest the lump sum amount in the low-risk fund and then systematically into the Equity funds. Auto investment helps to avoid breaking investments for petty reasons.
5. Patience and Belief: You need to keep in mind that your investments are based on facts and figures & are not just on some emotions. Wait till the tree is fully grown and then enjoy the fruits. Believe in yourself and your plan.
