The Seduction of Pessimism

Pessimism isn’t just more common than optimism. It also has a smarter sound. It’s more interesting intellectually and is given more consideration than optimism.

If you tell someone that everything will be wonderful, they will probably either ignore you or give a doubtful glance your way. You have their whole attention when you warn someone that they are in danger.

Often, pessimists extrapolate current trends without taking into consideration how markets respond.

So, at this point, what would be the wisest course of action as far as your investments and portfolio is concerned when there’s a huge pessimism around?

Firstly, Margin of safety – you may call it room for error or redundancy – is the only effective way to safely navigate a world that is governed by odds, not certainties.

Your portfolio needs to be diversified enough to withstand the kind of extreme short-term movements. Also, keep extra debt investments at roughly 5-10% of your total investments to give yourself the best chance to increase your wealth by anticipating market fluctuations.

The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.

Secondly, Compounding, which always requires time, drives growth. Single points of failure, which can occur in a matter of seconds, and loss of confidence, which can occur instantly, are what cause destruction.

Progress is slow, but setbacks and disasters happen quickly and impact fully. There are lots of overnight tragedies; there are rare overnight miracles.

Critically, you need to stay invested even when times look as bad as they did every year in the past. Investors should not think that they have to be either optimists or pessimists. Long-term success requires both, ie, to save like a pessimist and invest like an optimist.

(Contributed by Priya Goel, Financial Planner, Team Sukhoi, Hum Fauji Initiatives)

Looking to park your surplus money for a rainy day?

Do you have surplus money after meeting your emergency funds? Are you looking to park your money for the short term? Generally, most people prefer to keep their surplus money in traditional savings options, such as under their pillow or in a savings bank account over all others, and it may keep lying there for a long time.

Although, these options are convenient for day-to-day transactions but may not be the most efficient way to save surplus money as you get poor returns, if at all. Also, the real issue with traditional savings is inflation. A rise in inflation put a hole in purchasing power and thereby reduces the value of your such savings.

For parking your surplus money, shorter-duration debt funds such as liquid funds or ultra-short-term funds can be a good option for you. These funds are suitable to park the amount you have set aside to meet any emergency needs or any surplus money that you don’t need for few months or up to a year. These are highly liquid investments – when you require money, it gets credited to your bank account within 2-3 working days.

Here are some key features of these funds that you should know:

  1. These are open-ended debt funds without any lock-in period.
  2. The money is invested in money market instruments like a certificate of deposits, treasury bills, commercial papers, and short-term debt securities. These instruments have zero or low risk, offer fixed returns, and have a fixed maturity period.
  3. You can enter and exit from these funds anytime. The ultra-short term funds have no entry and exit loads, and liquid funds have exit load of up to one week only.
  4. You are likely to get higher returns than a Savings Account depending upon the prevailing interest rate scenario.

As we are going through an inflationary period, RBI would keep the interest rates high in order to curb inflation. It would act as a catalyst for the rise in returns of these debt funds. So, do not let your surplus money sit idle, let it reap the benefit of rising interest rates.

(Contributed by Yogesh Gola, Financial Planner, Team Vikrant, Hum Fauji Initiatives)

Marco- Economic Factors and Their Effect on Personal Finance

A financial plan paints a comprehensive picture of your current finances, your financial goals, and any strategies you’ve set to achieve your goals. However, it is important to realize that these decisions are also influenced by the larger picture, i.e.,
macroeconomic factors as below:
  • Inflation – The level of inflation present in an economy has a massive impact on the financial planning process for individuals. When inflation increases, the costs of goods and services increase, and the entire budget goes for a toss. Therefore, it is important to invest in asset classes like equity that provide inflation-beaten returns.
  • Business Cycle – Business cycles such as boom, recession, depression, etc also have a big impact on the way in which individuals plan their finances. Business cycles can affect us in numerous ways, from job-hunting to investing and understanding them is crucial for us. Knowing which assets especially stocks/sectors perform well in different phases of a business cycle can help an investor avoid certain risks and even grow the value of their portfolio in a contrary phase.
  • Monetary Policy – When central banks raise interest, the cost of borrowing money increases as lenders increase the interest rates charged on loans as well as existing loans. It has also an effect on bonds, equities, real estate, commodities, and currencies. Thus, RBI’s Monetary Policy has a direct impact on your personal finance.
  • Fiscal Policy – Fiscal policy is simply about how the government decides to spend money as well as set the tax rates/rules. When the government lowers income tax, citizens have more money to spend on goods and services. Hence, industries that make those goods and services boost the economy. On the contrary, when income tax is too high, citizens have less money in their pockets which reduces their buying power and slows down the economy.

Hence, macro factors have a huge impact on the micro. A good financial planner always ensures that macroeconomic factors are taken into account while preparing or making adjustments to your financial plan.

(Contributed by Sweta Kumari, Associate Financial Planner, Team Arjun, Hum Fauji Initiatives)

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