We Design Your Financial Destiny

(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

I Have A Live-In Relationship With My Investments

In human relations, getting married and living together till eternity is a good idea.

However, being wedded to your investments and staying with them forever is not such a good idea.

Each investment has its pros and cons. Therefore, at a certain stage in your life, it may be a good investment for you. As they say, the two of you may be compatible. But as your financial profile changes, the same investment could turn bad and become a liability.

So, ideally speaking, you must separate.

Unfortunately, people often don't change their investments...
... neither based on the change in their circumstances,
... nor maybe when the investments themselves turn bad.

They continue to hold on to their age-old investments — and prejudices — even when it is badly hurting their personal finances. They are reluctant to modify their portfolio as times and situations change.

The reasons, as discussed below, could be many:

For example, you blindly love your investments…
Thousands of crores of rupees find their way to bank fixed deposits. Even though the interest earning is nothing great, the safety offered by banks is a big attraction for many to keep their money in FDs.

On the other hand, debt mutual funds offer better post-tax returns (especially for people in the higher tax brackets). Even the penalty for early withdrawal is less / nil when compared to the fixed deposits. Plus, with no TDS (tax deduction at source), they are a lot less fussy. Most importantly, they are almost as safe as the bank FDs.

Yet people don’t change their attitude towards fixed deposits. They will chase higher interest rates in dubious co-operative banks or (equally) dubious company FDs.

But they will be very reluctant to consider debt mutual funds (simply because MFs don’t offer a fixed pre-decided rate of interest).

For example, your personal profile has changed…
While you are in the earning phase of your career and have to build a suitable retirement corpus which should last you around 20-30 years, equity is one of the best investments.

Yet, when you retire and your appetite to lose money has diminished, you cannot afford to be in equity (at least not more than say 10-20% of the total corpus). Therefore, a few years prior to retirement, you must progressively start switching from equity to debt investments.

Or, even in the very early years of your career, you can’t be invested too much into equity. Not because you cannot afford high risk, but because you need liquid money in the next 3-5 years for house purchase, marriage etc. But, once you are through with these early liabilities, you must increase your equity exposure.

I sincerely hope you are not wedded to your investments.

For example, your stocks may be down…
Pick up the equity portfolio of any investor and you will find quite a few dud and dead stocks.

Once bought with lots of hope and expectations, these are now either trading at a huge loss or maybe not traded at all. But you continue to hold them hoping that someday these stocks may be back in the limelight.

Ideally, you should always have a stop loss trigger price. As soon as the share price falls to this level, you must get out. You must not be married to any stock. But, loss aversion is a big obstacle in doing so. In the process, the stock keeps falling and beyond a point the damage is irreparable.

Even timely profit booking is a must. Good businesses may not always remain good. The churn rate is quite high. Look at the top 30 BSE Sensex companies say in 1998 and now twenty years later in 2018. How much the list has changed! So, except a few exceptions, you must get out once you have made reasonable profits — and, more importantly, reinvest in other newer businesses.

For example, the costs could be exorbitant…
Insurance policies such as endowment or moneyback are a favourite 'investment' for many investors. Often, due to mis-selling or Mar-end pressure to save tax, people end-up buying such policies.

Later, they realize that the returns from such policies will at best be a pathetic 4-6%. Or, they find that it would be really difficult to continue paying the high premium, year after year, for 2-3 decades.

But it’s too late now to quit. The surrender charges are so high that it is painful to incur such a huge loss.

This is wrong. If you separate early and realign your money to more productive investments, you will not only make up for the loss but also end up with a higher corpus.

Ideally, of course, you should keep away from such insurance plans.

For example, you are too lazy to go about making all the changes…
You are well aware of the deficiencies in your investments.

Yet, you fail to act! Simply because you are daunted by all the paperwork to be done. Simply because you are deterred by all the efforts you have to put in. 

Needless to mention, this is nothing but foolishness. You simply cannot allow your investments to rot. Timely action can save many investments from turning into disasters. As one saying goes 'a stitch in time saves nine'. In fact, our good fortune is that technology has made life very simple. We must make best use of it to REGULARLY restructure and realign our investments.

Concluding: I like to invest where we can part ways with minimum fuss and minimal costs. I like to invest where liquidity is good. I like to invest where I am not taxed too much. I like to invest where premature withdrawals are permitted. I like to invest where early redemptions are not penalized heavily. 

In other words, when it comes to my investments, I prefer to be in a live-in relationship as compared to marriage. Divorce, as you know, can be both messy and expensive.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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