As we get into the second quarter of 2021, life seems to have come full circle, as they say, and we seem to be well into a 2.0 version of last year. But just a few weeks back, the memories of 2020 and the troubles wrought by the pandemic seemed distant and fading. Life had more or less returned to normalcy in most parts, and people seemed to be mingling as though social distancing was a bad dream.
While the memories of last year seem short-lived, I have a different view on this – keeping the experiences of the last 12 months alive in our memories and better still, taking actionable insights from it to prepare for the future, may be one way of being safer and more secure in a future increasingly turbulent and uncertain. So, as we go into a vicious relapse, it may be prudent to quickly assess how each one of us fared during those stressful times.
Most of you would have heard of a “Stress Test”. In personal health, a stress test assesses the state of your overall fitness and particularly your heart. Simply put, a stress test simulates the health and strength of any system that you wish to test, through appropriately designed procedures. Similarly, one can design a stress test to check how prepared one is financially to endure a financial crisis, like what happened in the last few quarters.
Answering this simple six question test below will be a rudimentary yet effective way to check how healthy your personal finances are. Our latest article, published on Money9.
Our behaviors towards money and the money decisions that we make at various junctures in our life are influenced by our experiences at a formative level, right from childhood.
Am sure that this comes as no surprise, after all, money experiences are also a part of the various influences that form us through our life. Where I see a bit of a twist is that while my family was a fairly orthodox one, the women in the family were curiously still quite involved, and to some extent, even dominant, in some of the money decisions that were taken.
How do you plan for your financial well-being? Are the priorities the same for everyone or does it differ depending on your unique circumstances? In our experience over the years, we have noticed that a one-size-fits-all approach does not work when it comes to your finances.
When it comes to single women specially, their circumstances are different and to an extent unique, driven by not just their needs but also the prevailing laws, and therefore need to pay attention to the following.
A friend was talking to me recently about an interaction he was having with some others, where there was a furious debate on about where to invest, as well as which asset classes including geographies would deliver better returns going forward. As you would agree, this particular topic of debate is not uncommon at all and today’s information-empowered world has led to both more aware investors as well as more confused investors.
Investors usually seem overtly focused on “returns” and are always keen to know where to put their money next. This is especially so during a bull market, and when the recent past has given very good returns. But, excessive focus on returns is usually a function of “not enough focus” on a few other important yet ignored aspects. Focusing adequately on these other aspects leads to enough and more clarity on which asset class an investor should choose and what “returns” the investor should expect going forward.
Conventional wisdom has it that financial planning is the same irrespective of gender or marital status. I have interacted with a disproportionately high number of single women and beg to differ. The challenges that are faced by these women are vastly different.
|How then should they go about putting the pieces of their financial tapestry together?
When we discuss parents with most customers, they are prompt to let us know that their parents are sorted and are independent. Many believe that the situation will remain the same, and at worst one would need to increase the financial support to ensure the parents are not cutting corners and are comfortable.
What we have noticed over the years is something different. Many of them have lived life independently despite having a healthy and happy relationship with their parents. They do not envisage the need to become the primary caregivers to ageing, and many a times, sick parents. Not only can this throw your retirement cash flows haywire if not adequately planned for, it can also impact your planned lifestyle in retirement.
As we look forward to ringing in a new year, we are very hopeful for a better tomorrow. Any thoughts about 2020 brings a lot of bitterness and negative emotions. There are a lot of jokes doing the rounds which say one should not count this year to one’s age since it was mostly on a standstill.
While all of this is justifiably so, was it a complete washout? As a popular quote goes, “never let a crisis go waste”. I have quite a few positive takeaways for the year that has gone by, and I share a few of them with you.
Read our latest article, published on Moneycontrol.
Are real life situations and financial decisions assessed for risks in a very similar way by investors? There are parallels but they are not always handled similarly. Here are some anecdotes with some pertinent personal finance lessons, that helps us understand the differences in the choices people make in real-life situations, vs managing their money.
Read our latest article, published on Moneycontrol.
Enough has been spoken about the markets in last few months, including the never-seen-before kind of drops and recoveries. In such times, one would have assumed that retail investors would have beaten a hasty retreat, hoping to come back when markets seem a bit saner.
Surprisingly, that is not the case. The below 2 published data points indicate otherwise.
New demat account openings for most brokers have surged, with anywhere between 50 to 200% increases being reported, many of them first-time users.
Retail investors took advantage of the available time (due to the lockdown) and the valuations (in March & April post the ~ 35% crash) to enter and invest in the stock market to make some “quick” returns
Considering that the bulk of these new additions are online, it can be presumed that the average new investor is young and technology-savvy, while not afraid to take risks while seeking to make a quick buck
Is this good news? Well, it depends on how one looks at it. History indicates that institutional investors are generally smarter than retail, who usually enter late to the party. The average holding returns of mutual funds is significantly higher than the average investor returns in the same funds, underscoring this fact.
On the other hand, the fact that the market participation is broadening and that too in times of market distress is heartening and shows some maturity in the mind of the average retail investor. This millennial generation is possibly different and smarter than its precursors. They are also adopting the new “do-it-yourself” way, already popular in developed countries.
That said, trading in the stock market for short term gains is fraught with risks, and can result in substantial capital loss, if one doesn’t have a good hang of what one is doing. Having an Investment Framework based on the following 4 levers can possibly help today’s investor to increase his or her chances of success in the stock market.
Strong Knowledge-based Investment Hypothesis
Know each stock you invest in. Spend time on research, make sure you understand the company and its prospects, and do not get lured by tips and penny stock advice. This is fundamental to your framework and dilution here is akin to having a rotten foundation, leading your structure to fall, sooner or later.
Laid-down Investment Horizons & Goals
Even the best race-car driver needs a destination, a target. Similarly, map your purchase to an outcome based on your investment hypothesis, with a time-horizon in mind. Tie it to a goal, so that neither does your horizon become a moving target, nor are you tempted to exit early during adversities, impacting your goal.
Clear & Documented Process for Exits
Based on your investment hypothesis, you will know when you need to book profits, in case your target/goal is met. Similarly, however good your investment hypothesis might have been, factors change and hypotheses fail. So have a clear plan to exit in case things don’t play out the way you saw them. Having a documented process for both value-based and time-based exits, with clear rationales, is a good way to both, limit your losses and not fall in love with your darlings.
However good your stock selection maybe, expecting each to be a winner is unreasonable. Diversification is a hedge against both, failed hypotheses as well as capital loss. Build a portfolio of 15-20 stocks over time and have a cap on each stock as a % of your portfolio. 6 winners out of 10 is a good enough ratio for the portfolio.
Dear retail investor, Success in the stock market is an outcome of 3 factors – Relevant Knowledge, Robust Process and Resilient Temperament. Please use the above-mentioned levers to build a personal Investment Framework and whenever you feel swayed by emotion, go back to it and read it. You will find that not only is it helpful in the stock market, but in everyday life too. Happy investing!
Image credit: MayoFinance, Unsplash
Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families invest for their financial needs, follow their passions and achieve financial independence.
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A slightly modified version of this article was published recently on fpstudycircle.com.
The much-awaited festive season comes to an end and it has managed to rekindle hope and bring a lot of joy despite the restraints this year. Diwali has always been the most exciting time of the year for me and preparations for the festival start much in advance every year.
The customary “Diwali cleaning” is something I usually delegate to the willing and efficient staff and am usually pleased with the result of a superficially extra-clean house for a few weeks. This year, I decided to do a lot of the customary cleaning myself and I was surprised to take away some financial lessons from this exercise.
Read our latest article, published on Moneycontrol.