As a Financial Planner and an Investment Advisory firm, we come across quite a few biases over-and-over again while dealing with people from all walks of life. Sometimes it is quite surprising that many of the people know more about the state of nation’s and USA’s finances than their own! Investment myths abound, leading to mis-purchasing and misdirected savings. Due to this many investors burn their fingers and then swear to stay away from perfectly healthy investment avenues, only because they actually did not understand what they were getting into, in the first place. Here we present to you four very common investment myths.
Myth 01: I have made my Tax Saving Investments, so My Job is Done.
Fact 01: People who want to invest but are not too serious about it belong to this category. This is a common mistake made by investors. Saving on taxes is a good way to save money but it is not the end of investing – just a small part of it. There are many more things to be looked at while investing apart from just saving taxes. We should leave the habit of waiting till February or March for seeking tax deductions; instead we should plan all your investments from the very beginning of financial year (April) keeping tax deductions as just one more factor in mind.
Myth 02: Investing Should Be Exciting! I should Diversify As Much As Possible!
Fact 02: It is good to have a well diversified portfolio (debt, equity and gold) but within certain limits. Many investors get so wrapped up with diversification that they include every new product that hits the market in their portfolio and then, 1-2 years later wonder why their returns are only in the range of 2-3%, or maybe even negative. You do need a level of diversification across equity, debt, gold and maybe, real estate. Equity will beat inflation over the long term. Debt will protect your capital and give you steadier returns. Gold and real-estate will hedge against inflation. However, keep in mind that over-diversification can actually hurt you. Stick with well chosen equity mutual funds for diversification across companies, sensible fixed income products like PPF, FDs and liquid funds for your cash needs, and gold by way of ETFs / Gold MFs.
Myth 03: Plan for my retirement? I’ve got plenty of time for that!
Fact 03: You don’t. Any salaried person who does not have a retirement plan is inviting disaster. Life and the world’s economy are two things which should never be trusted for steady longevity! Plan for your retirement now and forget delaying it. As little as Rs 2,000 per month at an average returns rate of around 15% will fetch you nearly Rs 36 Lakhs by the time you are 60 if you are currently in your early or mid-20s.
Let’s take an example: Suppose in your post-retirement years you want to be able to spend today’s equivalent of Rs 75,000 on household expenses and Rs 25,000 per month on discretionary expenses, medical care, and any other expense you would like to consider. That’s Rs 75,000 per month plus Rs. 3,00,000 per year by today’s rates. You are currently 35 years old and would like to retire at 60. Taking inflation at 8% per annum, a life expectancy of 85 years, and post retirement returns at 8% as well (to keep things simple), you’re going to need Rs 20.54 crores to retire in peace and maintain your standard of living!! Even if you are going to get a pension from your employer, there is still a sufficiently large amount you would need to build up if you do not want your post-retirement standard of living to be maintained.
Myth 04: I can do this on my own; I don’t need a Financial Planner. They’re too expensive.
Fact 04: You must have heard that ‘A half-truth is far more dangerous than an outright lie’. Getting free financial advice or no advice at all, will be much costlier than the fee you would pay your Planner. A financial planner is important because you need someone who’s going to give you unbiased advice for not just what you want but what you need the most.
While investors are smarter today, they also have more to deal with more information, more products, more options (and therefore a surfeit of choice), more demands on their time and money, and more demands from themselves. You need someone who can sit down with you and create an over-arching financial plan that will help you overcome the financial myths, clear the financial fog, simplify your financial life, and help you gain complete control over it.
[This article has been adapted from an email article sent by Quantum Information Services Pvt Ltd (www.personalfn.com)]
Col (retd) Sanjeev Govila, CERTIFIED FINANCIAL PLANNERCM
CEO, Hum Fauji Initiatives,
Your Long-term Partner for Wealth Creation
9999 022 033, 011 – 4054 5977 (Off), humfauji.in