Focus on Big Picture

  •   Fri, Oct 09 2020
  •   By Naveen Julian Rego

October 9, 2020

Investing is not always about getting the highest returns or beating the markets. It should be about achieving one’s financial goals like safety for family, better life for children, maintaining one’s lifestyle on retirement, building a secondary passive stream of income or creating wealth.

Hence, as financial consumers it is more important to get the macro picture right rather than being too bothered with smaller things. Let me explain this with suitable examples. Do note that the numbers and names are chosen randomly but they would be suited to your personal finances too.

1. Ram and Dennis are of the same age and earning similar incomes of roughly Rs 50,000 p.m. While Ram saves 50% of his income and invest @ 6% p.a. while Dennis saves only 20% of his income and searches for high return products which yield 15% p.a. consistently (tough to find though). Fast forward 10 years. Ram accumulates Rs 41 lakhs whereas Dennis dabbling for high return products could only accumulate Rs 27.50 lakhs. While earning high returns are not in our control, focusing on more savings is definitely within our control. Message is focus on Savings and not high returns.

2. Anu has a financial portfolio of roughly Rs 2 crores. She has Rs 10 lakhs invested in equity markets and equity mutual funds (roughly 5%). The remaining (95%) are deployed in FD’s and other fixed income bearing instruments which yield her 5% p.a. Anu spends lot of time tracking markets and gets very worried with the volatility. Now let us imagine, even if she earns 20% returns from equity portfolio, her overall returns will only increase to 5.75% p.a. which is still a small number. Was the allocation in equity worth the effort?? Anu would do well to focus her energy on her 95% wealth which is stagnating. Message is focus on good meaningful allocations to get better outcomes.

3. Tenali has an overall financial wealth which is roughly Rs 5 crores. He had invested roughly Rs 20 lakhs in a mutual fund which got stuck because of supposedly aggressive investments. This has given him such a rude shock that he is not able to come out of it. But think of it – this investment is hardly 4% of his wealth. This loss could be made good easily by prudent management of his other 96% wealth. Message is focus on the overall numbers and don’t get disheartened if some small portions go bad.

4. Desmond is a rich retired man with financial wealth of Rs 3 crores with predominant investments in safe investments. He has invested Rs 15 lakhs in equity products (just 5%) and is constantly complaining that equity does not give good returns. His monthly lifestyle expenses are a maximum Rs 50,000. Even if the Rs 3 crores are conservatively deployed, he can manage his regular expenses well. There is no need of equity linked allocation for Desmond which is spoiling his peace of mind. Message is focus on the financial goal and not high returns.

5. Ravi loves the growth of the equity markets and is fairly convinced of its long-term prospects. He however fears the short-term extreme volatility of equity assets. He has hence marked his allocation to equity between 35% to 50% and the remaining in conservative allocation. The equity allocation is also fairly diversified in different strategies to give better risk adjusted growth. Message is to focus on asset allocation and diversification.

The list and examples can go on and on. But the message is very clear. Focus on the big picture which can make meaningful difference to your financial life. Everything else is a plain distraction. As financial planners, we have been continuously advocating the principles of asset allocation, diversification and cost control so as to make the most of investment opportunities based on one’s risk profile. We believe if Risks are managed well, the returns will take care of itself.

Wishing you all a safe and exciting investment experience.

Note:

1. It is very important to consult a Professional Planner/Investment Adviser while implementing any of the above ideas.
2. The above are mere suggestions and not Investment Advice as individual cases might differ.

 

 

 
By Naveen Julian Rego
Naveen Julian Rego is a certified financial planner.
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Comment on this article

  • Rohan, Mangalore

    Fri, Oct 09 2020

    Dear Julian,
    We believe if Risks are managed well, the returns will take care of itself. This is an awesome sentence in your write up. What is the degree or percentage of risk that can be well managed?
    Maybe it depends on the products on offer. Some products like equities have high underlying risks which are ignored by investors who loose their hard earned money... The markets are liquidity driven and are far from reality may be that's how they have been but managing this risk or uncertainty is sure to be a Herculean task...


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