Why I am not willing to splurge.

I met a friend who happens to know a legendary investor having net worth of over a billion USD. With that kind of money, one would imagine that this guy would own a Rolce Royce and wear luxury watches, etc. However I was not surprised to learn that Mr. Money Bags prefers much lower brands – brands that one used to aspire for when one was in college with no money. Middle class guys would dream “Yaar, one day I will buy a new honda….”

So is he a miser? I don’t think so. It all depends on what gives you CHAI. He said that being driven around in a Rolce Royce is just not him. Once my client told me he would not feel like himself if he was in a Mercedes; his aspiration was maximum a skoda. So what is wrong in that?

It is because one who has worked hard for his buck feels the pain of spending it. This might be true to some extent. I know some rich Dads who have not provided any training to their kids and given them everything on a platter.

These kids blow away the wealth quickly- easy come, easy go. However at the same time, I know people who have lived in very dire conditions. As soon they start earning, they start living life king size.

So who is correct? Well I am not going to draw any valuable judgement. I’m just observing how people have different perspectives about money. Some people just cannot spend or rather splurge on big brands. As I said, wealth is not just science; there is a lot of psychology involved in wealth management.

Market Moves

Sensex was at 31,000 just the other day. Today it touched 27,000. If you don’t have the nerves for such fluctuations, then you should not be in the market.

A friend of mine retired recently. So he is free and is chilling at home. He did not see the World Cup Cricket semi-final match-India V/S Australia. He says he does not have the nerves.

So is staying away the solution? One might be losing out on opportunities for long term capital gains by staying away from the market.

Personal Wealth, like many other things, is a matter of Science and Psychology. One must understand this and accordingly try to master the art of managing your nerves. Luckily there is a lot of literature available on this subject, if one is interested.

Diversification or Focus

I have often heard Investment advisers saying that you must diversify your portfolio. The logic is very simple- don’t put all your eggs in one basket. If you have invested in say real estate, gold, shares and art, if one category fared badly, another would fare well and thus your risk is mitigated. Your average returns will be healthy; this is what they say.

Well for an average investor who does not do much research before investing, probably this might be good advice. Such an investor only invests money while investing; he does not invest time. I have seen investors in stock market who own more than 100 scrips; their logic is diversification. In fact, they are the guys who should not be buying stocks directly because they do not understand the market. They feel that they can cover their risk by blindly investing in all the stocks that are recommended by different experts. At least some of them will click and give them the satisfaction of a winner. The question is what about the losers? Well, they believe that they have not suffered a loss until they have sold their shares. So they will proudly tell stories about their winners and the losers are not losers – they are investments for the long term! Dude, who are you trying to fool?

Diversification, most of the times, is an excuse for not doing enough research about the long term prospects. Diversification turns into diworsification in such cases. If one studies the really successful investors in history, they are the guys who have focused on specific sectors. They have invested time to understand certain opportunities and based on years of very close observation, they have honed their skills and developed insights into specific sectors. Having gained insights, they have focused their investment in these areas and have earned huge returns. Yes, they can go wrong also. So they will follow certain hedging tactics based on certain carefully researched methodology, not a blind spreading of their investment based on fear.

Mutual fund concept by itself is a diversified portfolio. I have seen “investors” investing in equity schemes of 20 different mutual funds based on the logic of diversification. I have never seen such “investors” making money because they don’t invest to win. Their prime motive is to avoid defeat; hence they never win in the game of investment.

So what should you do when you are starting your journey on the road of Investment?

My first advice, before investing your money, invests your time to learn more about various investment avenues. In the meanwhile consolidate your investments/ savings by investing in a few Mutual Funds (a balanced fund is advisable – maximum 3 to 5 folios). I am a great believer in consolidation. One must be able to count his investments on his fingertips (thumbs excluded!). So maximum 8 avenues at any point of time is a general advice I will give to all investors. If you want to violate this rule, then 9 is fine- the “Navaratnas” in your life must be enough diversification in your portfolio. If you exceed this limit, then maybe you are not confident about your investments-you need to do more homework!

So are you investing time (remember ROTI) to become a better Investor? Please share your stories.

Financial Literacy for Housewives

India has produced some top class financial talent among the ladies. Our ladies occupy some of the top positions in Banks and financial institutions. Yet the Indian housewives stay a bit aloof from the financial affairs. Maybe it is the result of our joint family tradition when ladies were discouraged from looking into the financial affairs of the family.

A frugal wife has been the biggest contribution to my financial success. It laid the foundation for generating savings from early on in life. I was very clear that I did not want to marry a working woman. I wanted my partner to be a full time home maker – that was my clear choice. I focused on Ai- my CA practice and she focused on the home; my 2 kids and my parents. This provided a very good balance.

Recently I was giving a talk to a housewives group about their relationship with money. That set me thinking.

The wealth vehicle runs on 4 wheels- ESIC- Earnings, Savings, Investment and Conservation. Your earnings are of 2 types- Ai and Pi. The home maker can play a role in Pi. She can play role in Savings by being an astute Finance Manager of the home finances. On investment matters also she can play a role by collecting information and analysing various options available. Today information is very easily available on the net. Many professionals working hard in Ai zone lose sight of Pi. The wife can play her role in setting Goals, monitoring progress and managing the paper work, for which the man may not have the time or the temperament. And finally the wife can ensure that Conservation is given due importance- all premiums for life and health insurance are paid on time.

I have prepared a checklist for homemakers which I use for ladies at my workshops. I will share in detail some other time. Some of the boxes to be ticked are as follows.

• Are you aware of the location of various documents relating to your Investments?
• Are you aware of the due dates for maturity of your Insurance Policies?
• Are you aware of the due dates for payment of premium for various health and life insurance policies?
• Are you aware of the procedure for filing claims for health insurance and life insurance?
• Are you aware about the filing of your tax returns and do you have all relevant documents in a proper file?
• Have you and your spouse prepared a Will?
• Have you made proper Nominations for all your Bank accounts, your Investments and your house?

As I said you have to take control of your health and your wealth. It is therefore necessary to have certain basic knowledge about these 2 critical areas of your life. You cannot leave this in control of others.

Please leave your feedback in the comments below!