Life long Lessons for Investors

Successful investors have a lot to share from their experiences which goes beyond just numbers. Almost every such person would agree that investment success is linked much more to investor behaviour and investment approach more than anything else in investing. It practically has nothing to do with choosing best performing products or market timing but everything to do with how you see and manage things over time. The following are a few of the priceless lessons that successful investors often share with others.

1. Big picture:

You don’t want to look at one little piece of the pie. As an investor, you should always have a big picture in your mind whenever you are assessing your investments. The big picture is looking at your entire net-worth and cash flows. This takes into consideration all your assets and liabilities in mind, plus all your incomes and expenses. It should also take into consideration the risks that you are facing, both physical & monetary, and the protection (or insurance) you have to mitigate such risks. Any big financial decision should be contextual of this big picture.

2. Self Investment:

Self-investment or steps to improve your skills, knowledge and capabilities should always be a life-long pursuit for most of us. Whether you are an entrepreneur, professional or a salaried individual, such an approach and self-development initiatives will enhance your opportunities for the future. Self-development should be on top of your agenda as technology and rapid changes are impacting almost every industry today and will impact your today or tomorrow. If one is ready and takes action keeping such things in mind, the financial future will likely be much more secure.

3. Investment style /strategy:

Every good investor tends to develop his style and strategy over the years. Such a time-tested approach to investment brings more discipline, certainty in investments while removing bias and emotional reactions from decision making. If you are a new investor, we would urge you to learn from the experience of successful investors, personal experience and from financial experts to develop your style and strategy. It is also important that you remain flexible enough to change your ways based on new learnings and guidance from experts. Such an approach to your financials will hold you in good stead in your life.

4. Keep good habits:

Developing good money habits is you should adopt very early on in life. There is a solid reason to develop basic habits of savings, avoiding excessive spending, have patience in financial decisions, living within a budget, avoiding bad debt and so on. The good habits go a very long way in strengthening the roots of your financial well-being over time. Good financial habits are directly responsible for your financial situation today and also for tomorrow.

5. Avoiding big mistakes:

Just as important is to develop good financial habits, it is also important to avoid big financial mistakes in life. Even a single big financial decision gone wrong can ruin a lifetime of wealth created from good decisions and good habits. Hence, big financial decisions must be taken with care, patience and proper assessment. Needless to say, avoiding insurance or under-insurance is one of the big mistakes that people do. Another important mistake would be w.r.t. investments in unregulated investment firms like chit-funds, etc. Real estate investments is another area where decision making has to be proper to avoid long-term net negative impact on your portfolio, keeping in mind the other opportunities available in the market.

6. Be decisive:

A lot many investors lose precious opportunities and time by avoiding decision making in time. Time is of great essence when it comes to investing. Being laid back or delaying your decisions carry a delay-cost for any new investment or even otherwise. Money anywhere is either earning or costing interest/capital gains or is at risk in some form. Being decisive means that you do not let things get delayed and cost you directly or indirectly.

7. Take calculated risks:

Taking risks is one of the virtues appreciated today. There is a change in culture which is encouraging many to take risks in entrepreneurship. As investors, we too should be open to explore ideas and asset classes that offer better risk-return trade-offs in the long-term. Investors should not be too cautious to not take any risks in the portfolio and settle for interest income from traditional investments. Investors could do much better if they focus on real, inflation-adjusted, post-tax returns from their investment choices. A bit of risk for better returns in long-run is essential for wealth creation.

8. True Happiness:

The most important thing in life would be peace and happiness. However, this is not something which is beyond the reach of us and is independent of your financial situation. If you are unhappy with one crore of net-worth, you will still be unhappy with even a hundred crore of net-worth. One has no reason to be unhappy on the financial front if life's basic requirements like home, livelihood and financial goals like retirement, education & marriage for a child, etc have been adequately addressed /planned for with reasonable expectations. True happiness, beyond this level, is thus a state of mind and very subjective. Happiness beyond this would come from things like a loving family, good health, sharing, charity and having a good social standing. Focus on these things too to enjoy peace and true happiness beyond money.

Investing Obstacles to Conquer:

The beauty lies in the eyes of the beholder. The measure of anyone's personal or financial success is also a very subjective term. Similarly, the obstacles on the journey to financial success also differ from person to person. What may be challenging for one person may not seem so for the other person. In this article, we will talk about the common obstacles that keep you away from being a successful investor and from fully realising your financial goals.

Getting driven by emotions:

There are many emotions at play when it comes to money. The most prominent and commonly observed emotions are greed, herd mentality, fear, overconfidence, biases and ego. Each of these emotions may play a role in decision making and force you subconsciously to make bad financial decisions. Let us see how.

Greed drives a person to make decisions anticipating quick money. Unfortunately, such things often end up burning your money. Herd mentality is where you follow the market or others even though logic may point you to go in another direction. Fear is where you are trapped in a negative mindset and believe that the worst is yet to come when the markets are going through a bad phase. You will likely give up when things are going bad when in fact, an opposite action may be required. Overconfidence is where you believe that your understanding or knowledge is superior to others and you are 'right'. With overconfidence, you may not listen to sane advice or be open to contradictory info. Biasness is where you establish an emotional bond with any particular investment or product either positively or negatively. This positive or negative emotion will not let you evaluate any investment objectively and you may end up taking biased decisions. Ego is where you take a stand to protect your word and not accept any mistake or failure on your part. Ego in financial matters may even force you to take decisions which are clearly risky.

Over-monitoring your equity investments:

Financial assets and investments are perhaps the only long term investment which we tend to measure almost on a daily basis. We never measure the value of our property or the second home we bought. We never evaluate the value of jewellery or gold we have saved for our daughter. We even do not care to see the value of almost every traditional investment product like bank fixed deposit, ULIP policy, PPF, NSC, NPS, etc. The only thing we are interested in knowing on a daily basis is the value of your equity portfolio, irrespective of how much share it has in your total portfolio. Why are we doing that?

Your equity investments, especially those in mutual fund equity schemes are your long term investment assets. It would be just ok if you looked at their value – say on a monthly frequency. The evaluation of the portfolio should be done on a yearly basis or half-yearly basis at most. Over monitoring your portfolio will force you to see short term performance which may not be the right thing to do. It will also only increase your anxiety and give needless stress to you.

Being unclear about your goals:

For any target to be achieved, you need a plan. Without a plan, a goal, nothing worthwhile can be achieved. An average person's life can be seen as a long list of personal and financial goals. On this list are things like the purchase of a car, home, child's tuition and education fees, marriage planning, holidays, second home, retirement kitty, starting a business, and so on. However, we have limited resources in our hands in the form of our salary or business income.

The need to define goals can never be underestimated. The big mistake that people do is to not really plan for their financial goals and the primary obstacle to achieving the same.

Ignoring real financial problems:

There are many around us who are earning well but often find very little money to save. There are also many others who have loan EMIs almost equal to their income. We often find that people in their early career having much more expensive mobile phones compared to their bosses! But there are also others who may not look to be rich but still have quietly built properties and amassed wealth slowly over time. The conclusion is that it is not really about how much you earn but about how you manage your finances that will decide how much you will save. Spending behaviour, your lifestyle, tax and insurance planning, investment planning, debt management, etc will together decide how much wealth you will create. Ignoring the fact that you are not going through any financial challenges is an obstacle to achieving investing success.

Over-emphasising certain risks:

Many investors see only one type of risk – the risk of investing in equity asset class. True, an equity asset class does carry some risks. However, there is a risk in virtually everything. The biggest risk is of inflation – the risk of losing the real value of money. If we are too careful with our money for far too long, that is a perfect recipe for wealth destruction. Compare between two child – one who is allowed to play, go out, take risks and make mistakes and one who is overprotected and not allowed to even go out. Which child do you think will be more successful? Similarly, with wealth too, we need to give it some space, diversification and risks in order to grow. We must realise that the traditional saving avenues, bank deposits, etc. do carry some unseen risks, especially in the long term. This may perhaps far out-weigh the visible risks of investing in equities through mutual funds.

Conclusion:

The obstacles to successful investing and enjoying financial well-being has a lot to do with how we think, feel, react and behave with our money. Self-introspection within ourselves will perhaps unravel much more insights and challenges or obstacles than we could ever imagine. Realising and accepting these obstacles would be the first step towards ensuring investing success and also financial well-being in our lives.

What Is an Annual Financial Plan?

An annual financial plan is a way to determine where you are financially at this particular moment. That means taking into consideration all your assets (how much you get paid, what's in your savings and checking accounts, how much is in your retirement fund), as well as your liabilities, including loans, credit cards, and other personal debts. Don't forget to include things like your mortgage or rent, plus any of your utility bills and other monthly expenses. This snapshot should also factor in what your goals are and what you'll need to accomplish in order to get there. This can include things like retirement planning, tax planning, and investment strategies.

Annual Financial Plan Check-Up

Now that you know what an annual financial plan is and how to make one, let’s recap the most important steps in the process. Check off each step that you've considered, even if your response was, "No, I don't want to refinance my mortgage," or "My credit cards are already paid off." The idea is to make sure you've looked at the issue. But you do need to cover every item in our first section so that you have a full financial inventory.

Create Your Personal Financial Inventory

Your personal financial inventory is important because it gives you a snapshot of the health of your bottom line. This annual self-check should include:

• A list of assets, including items like your emergency fund, retirement accounts, other investment and savings accounts, real estate equity, education savings, etc. (any valuable jewelry, such as an engagement ring, belongs here, too).

• A list of debts, including your mortgage, student loans, credit cards, and other loans.

• A calculation of your credit utilization ratio, which is the amount of debt you have versus your total credit limit.

• Your credit report and score.

• A review of the fees you’re paying to a financial advisor if any,and the services he or she provides.

Set Financial Goals

Once you have a personal financial inventory completed, you can move on to setting goals for the remainder of the year, or even for the next 12 months. Your goals will be short-term, mid-term and long-term.

Among your short-term goals might be to:

• Establish a budget.

• Create an emergency fund or increase your emergency fund savings.

• Pay off credit cards.

Your mid-term goals might include:

• Get life insurance and disability income insurance.

• Think about your dreams, such as buying a first home or vacation home, renovating, moving – or saving so that you'll have money to have a family or to send children or grandchildren to college.

Then, review your long-term goals, including:

• Determine how much of a nest egg you’ll need to save for a comfortable retirement.

• Figure out how to increase your retirement savings.

Focus on Family

If you’re married, there are certain things that you and your spouse should be thinking about on the financial front. These are some of the items that may be on your punch list:

• If you have children, determine how much you’ll need to save for future college expenses.

• Choose the right college saving account.

• If you are caring for elderly parents, investigate whether long-term care insurance or life insurance can help.

• Purchase life innnsurace for yourself and your spouse.

• Start to plan how you and your spouse will time your retirement, including your Social Security claiming strategy.

Review Your Investments

It’s important for investors to take stock of where their investments are during the annual financial planning process. This is especially true when the economy undergoes a shift, as is happening now.

• Check your asset allocation. If stocks are taking a dive, for example, you may consider adding real estate investments into yourportfolio mix to offset some of the volatility.

• Then figure out which investments will do the best job of meeting your asset allocation goals – and whether your current investments still fit that profile.

Rebalance Your Portfolio

Periodically rebalance your portfolio ensures that you’re not carrying too much risk or wasting your investment dollars on securities that aren't generating a decent rate of return. It also makes sure that your current portfolio reflects your investment strategy (changes in the market often cause a shift that needs to be corrected to maintain the diversification you originally planned).

• Look at which asset classes you have in your portfolio and where the gaps are. If necessary, refocus your investments to even things out.

• Consider the costs of managing your portfolio .

Plan on Addressing Tax Planning for Investments

While you’re looking over your portfolio and rebalancing, don’t forget to factor in how selling off assets may affect your tax liability. If you’re selling investments at a profit, you’ll be responsible for paying short- or long-term capital gain tax, depending on how long you held the assets.This step can wait until the end of the year. When you get to that point in time, you'll want to consider these strategies:

• Harvest tax losses by replacing losing investment with different ones to offset a potentially higher tax bill.

• Look into whether you should offset capital gains and losses.

• Investigate whether it makes sense to use appreciated securities to make charitable donation or support lower-income family members.

Update Your Financial Emergency Plan

A sizable emergency fund is helpful if you run into a financial rainy day; be sure you have socked away adequate resources. While you’re at it, look at your broader emergency plan as a whole.

• If you don’t have three to six months’ worth of expenses tucked away, building your emergency savings should be a top priority.

• Invest in insurance: Are you covered for a temporary disability, for example?

• Make sure you have a financial and medical power of attorney in place.

Look Ahead to Future Savings

As you move into the fall, think about where else you could be saving money to fully fund your emergency savings and put aside more for the future. Consider whether you should:

• Refinance your mortgage.

• Rethink your car insurance.

• Lower your food bill.

• Utilize Flex spending or health saving accounts.

• Cut the cable TV cord.

• Curb your energy bill.

• Divert your paycheck to savings, by contributing more to retirement accounts or funneling money directly from your paycheck to an emergency savings account.

The Bottom Line

An annual financial plan is an exceptionally valuable tool for your life (and peace of mind) today and for your future. Best-case scenario: you've checked off all the items on this punch list by now. If not, don’t hesitate to pencil in time on your calendar to do so.