Avoid mistakes and have a great financial life:
As a financial planner I meet many investors and try to understand what they are trying to do. I have realized one thing very clearly that investors don’t have sufficient knowledge of personal finance and in an effort to generate maximum returns they keep trying new things every time and make mistakes and waste important years of their financial life. Investors should not try too many different things and make mistakes because every mistake has a compounding impact on their financial life.
Why investors try new things?
Finance is a subject which apparently looks very simple and lt seems that doing this or taking this particular action is very simple and it will easily benefit me but when those actions are taken the analysis that is done by investors is a primary basic analysis and not the detailed exact analysis. Due to this, investors fail and have a severe impact in their financial life. Let me explain this with an example. In 2007 bull market, investors started investing in small penny stocks and initially made good amount of money so they thought that it is easy to make money here and started buying this type of stocks and avoided buying mutual funds with a thought that they themselves are doing better than mutual funds. What happen after that? all those penny stocks are nowhere today, people have lost their hard earned money and most of the mutual funds have given very good returns. Other example is investors keep buying Unit linked insurance plans and traditional insurance plans as against Term insurance plans with an understanding that ULIPs and Traditional plans return some money whereas Term insurance plans don’t . But if you make detailed calculation Traditional plans and Ulips are relatively costly as compared to Term Plans (refer my earlier article on this- Which Type of Life Insurance Policy you should Buy? )a Another such example is fund selection, I have seen many investors going on different websites and selecting top performing funds of last one or three years or five star rated funds and investing in it and after few months they find that the rating has reduced or that fund has fallen in performance ranking than what to do know?, actually they cannot see non numeric factors like quality of fund management, process followed in fund management etc.
Financial World looks simple:
Many times investors commit such mistakes because they see the financial world from one side and they can see only what is shown to them so they keep committing such mistakes. But wealth is created only by consistent long term returns and for that you have to take care that you don’t make any mistakes and keep your financial life on track.
Making no mistakes is doing a great job:
While taking such actions as discussed in above paragraph, investors feel that they will generate some extra ordinary returns and are doing a wise thing but most of the times it turns out to be a mistake and hurts their portfolio very badly so rather than trying too hard to do some miracle, be simple and consistent with your investment strategies and try to achieve long term consistent returns. If an investor had invested 50% of his investment in Sensex in 1979 and remaining 50% in a fixed income instrument giving 8% p.a. kind of return and done re-balancing every year, he could have easily achieved 14% p.a. plus compounded annualized returns in his portfolio and achieving 14% plus return in your portfolio for 35 years is not less than a miracle. It is easy to double your money once in a stock but difficult to make 14% p.a. kind of returns for such a long term.
Your financial life is a Test Match so never play it like a Twenty Twenty:
Your financial life is like a test match, it has long innings to go and you don’t need to hit too many boundaries because you have lot of time to play. You just need to save wickets and wait for loose balls to come. Similarly in your financial life just focus on simplicity, consistency and avoid mistakes so that you can have very good returns and create good amount of wealth over long term.