For the want of a nail the shoe was lost,
For the want of a shoe the horse was lost,
For the want of a horse the rider was lost,
For the want of a rider the battle was lost,
For the want of a battle the kingdom was lost,
And all for the want of a horseshoe-nail.”
― Benjamin Franklin
It may not sound nice to the ear, but as Indians, we are, in general, poor at DIY (Do It Yourself). As such, we are not brought up in a DIY culture and this perpetuates. Even now, we are used to having help at home for the smallest of things, and as a result, an average middle-class Indian is hugely lacking in basic life-skills as compared to his counterparts in most developed economies.
To make things worse, we place a premium on DIY when it comes to knowledge-skills. It could be that it gives bragging rights that you could manage something by yourself, when many others found the need to engage with a professional to get ahead.
For example, we resort to self-medication because the symptoms seem “similar to what she had” or worse, we googled it up. Similarly, planning and managing your personal finances often is a DIY activity. While this may work at times, what many people don’t see is the many risks that one may encounter due to this.
In the hundreds of interactions with numerous customers over the past few years in my financial planning practice, I have seen many such mistakes committed. I have tried to list a few commonly encountered ones to help you avoid the DIY trap.
Investing too little
This is something we see often. There is a lot of media noise around mutual funds, and listening to the ‘mutual fund sahi hai’ campaign on a constant basis, people feel the need to be a part of the success story. They decide that setting aside some money is required and start with some small amount. A person whose monthly expenditure is Rs 1 lakh starts saving Rs 10000 per month in MFs and is very happy that he is putting something away for the future. For a low-income family, whose monthly expenses are Rs 25000, being able to save Rs 10000 per month consistently truly deserves a pat on the back, since the family is saving a substantial part of their income and may well on its way to financial freedom. But in the above example the Rs 10000 investment in mutual funds is not going to help you save anything substantial and is a mere tick-mark activity which lulls you into believing you are saving, thereby allowing you to indulge guilt free.
Not assigning any goals
In almost all cases when money is invested there is never a purpose to it. When you invest without a purpose it is mentally extremely easy to redeem. The next iPhone upgrade or the long-dreamt-of trip to New Zealand seems like an emergency, when you have sufficient money invested. Imagine if the savings were given a name, say Child Higher Education Fund. What are the chances that you would withdraw from it, to fund your trip to New Zealand?
Trying to time the market
When you are sitting on the fence, it never seems like the right time to start investing. One month you are worried that the markets are creating new highs every day, second month you are worried that the political situation may spell dooms day to your investments and the third month you are worried about recession. If you are investing with a horizon of 7 to 10 years what happens in this month or the next is not going to have much of an impact on the outcome. What is important is to get off the fence and get into the field of play.
Investing in schemes based purely on recent performance
Most investments are based on past performance, and even star ratings of Mutual Funds are largely based on past performance. One should keep in mind the recent performance has a huge bearing on the 1-year, 3-year and even 5-year returns. It is also important to understand the reasons for the outperformance or underperformance before deciding. Make sure that your investment advisor has a proper framework for selection is important.
Discontinuing investments during down times
Markets are by nature turbulent, and you are going to have to accept your share of this, if you are in for the long haul. It is important to have conviction in your choices and stay put. However, there is a lot of noise in the media and Whatsapp forwards from well-meaning friends proclaiming that doomsday is around the corner. The immediate instinct in such situations is to stop any further investments. However, that would be a very bad strategy since you are getting an opportunity to accumulate at lower prices. Unfortunately, this awakening will come in hindsight.
Not bothering to understand tax implication
Many a times we see people have invested without understanding the tax implications. Just because the dividend which is given to you is tax free does not mean there is no tax applicable on it. It is paid out after tax is paid by the AMC. There have been cases were people have invested in dividend pay-out option for years when they had no use for the dividend and had no clue what they did with dividends. They would have been better of in growth option where the capital would have appreciated substantially given the long tenure of investment. In other cases, we have seen people in 10% slab investing in dividend option of Debt fund where the tax is much higher. Investing in NPS without checking the taxability on exit. Buying ULIPs purely for the taxability. The list is very long and exhaustive but I guess the point is made.
Have a laundry list of investments in the name of diversification
The intention is right, one should not put all eggs in one basket. However, having 25 schemes in the name of diversification is no good. Further there is no thought given to overlap. It would be a good idea to start investing only after you clearly decide how much goes into debt, equity and other assets. Within equity you need to decide percentage allocation to MF, stock, PMS etc and have optimum stocks /schemes and not go over-board with it.
Taking your RM at face value
For many clients, the trust they have on the RM is a transfer of the trust they have in the Bank. They truly believe that products suggested by him/her is totally in their interest. I wish this were true, but its not! We encounter customers who have been sold the wrong products – eg. bad performers, high lock-in products with little or no exit options, complete laggards, etc. so often. Remember, there is no free lunch, if someone is giving you a “free” recommendation in your interest, it may make sense to understand how he is compensated for his time and effort.
Last but not the least is following the crowd. The crowd is always excited when markets are touching new highs every day. They don’t want to be left behind and hence jump in when markets have already gone up. However as soon as they see some down side they want to jump the boat. Where-as caution is in order when markets are going up and one should invest more if possible when markets are going down. However, to do this you require conviction and belief.
As the title says, it makes little sense to learn by making mistakes with your own money rather than engaging with a professional at a fraction of that sum. They could guide you to take better decisions and keep you safe from your impulses.
After all, Benjamin Graham did say ‘The investor’s chief problem – and even his worst enemy – is likely to be himself.” Think about it!
Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.
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Image by Steve Buissinne from Pixabay