Expert advice

Mar 14, 2016,10.18 IST

Where does this road lead to?

Amit Trivedi

“Where does this road lead to?” I was surprised that two people asked me the same question on a single day. I had gone for a morning walk and within just 10 minutes, two persons asked me this.

My answer to both was, “Where do you want to go?” The moment they told me the destination, it was easy for me to guide them which way to go. They both knew their destination and still asked a wrong question. Had I tried to answer the question without probing, I could have told them anything. The chances are high that my answer would not have been of any help to either.

It is easy for most to understand how ridiculous the question was. In day-to-day life, when we come across such questions, we know whether the question makes sense. It is easy for us to ask a follow up question to find out the real question, and accordingly guide or answer.

However, investing is a different field. We keep getting such a question very regularly. “How much return should I expect from this scheme?” or “Which scheme would offer higher returns?” or “Which is a better investment choice?” are variants of “Where does this road lead to?”

In a journey, we want to reach the destination. For that purpose, we take up the journey. The sole purpose of the journey is to reach the destination. Though some people travel only for the purpose of exploring a new location or a new path, in most cases, the objective is to reach a destination.

In case of personal finance, the destination for most people is the financial goals that they seek to achieve. This goal could be to accumulate money for the down payment for purchase of a house, or to pay the higher education fees for the daughter or to accumulate enough sums to generate income for retirement. Investments are like a journey. As we saw earlier, the journey is undertaken to reach a destination, investments are made to achieve financial goals.

Given this, it is critical that we know the financial goals first. Any other question must be asked only after this first one has been answered, “Where do you want to go?” or “What are the financial goals?”

While reaching the destination is more important, we keep focusing on the rate of returns. It is equivalent of focusing only on speed in a journey. As we all know that in a journey, direction is more important than speed. If the speed is slow, but the direction right, you would reach the destination late, but if the speed is high and direction wrong, you may reach somewhere else. We all know this simple fact. Still, the discussions about investments focus too much on speed – the rate of return and not the financial goal, which is the determinant of the direction.

Identify your financial goals and then plan to achieve those. Which scheme should be a part of the plan is a secondary question.

The author runs Karmayog Knowledge Academy. Views expressed here are his personal views. He can be reached at amit@karmayog-knowledge.com.
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