Here we are sharing some of the facts which youngster should know before getting married or before turning 30. These are the points normally ignored while making investmentsand may result in mistakes.
Atul and Rahul are brothers, both earning well and are settled in Pune. Atul is 35 years old, married with 2 kids and is working with an IT firm. Atul considers himself very active with his investments and with his own research, invests~30% of his monthly salary, mostly into insurance policies and other bank deposit. On the other hand Rahul 25 years old, have just started working, is a risk taker and loves to invest into equities as well. Both always disagree with each other’s method of investing. Rahul used to consult with his advisor on different products before investing and once thought to introduce his advisor to his brother.
Before meeting, Atul was very confident that his way of investing is correct and he requires no changes in his portfolio. But during the meeting when advisor asked him questions regarding his retirement planning and how he would beat inflation with the current asset allocation, he had no answers. And when advisor showed him the difference his portfolio would have made while investing in a different way, he was surprised to see the results. He never thought about those factors while investing. He though he lost 10 years of his life in making mistakes. He then decided to make changes into his portfolio and also thanked advisor for introducing him with the different facts related with investing.
So below are the factors to consider while investing:
1. Importance of inflation: Most of the people while setting up the goal amount do not consider the role of inflation. They forget that because of inflation, the amount required for goal will increase and thus one may not reach reach the goal. For e.g..Education costs of Rs.5 lakh today will be worth Rs.23 lakh after 20 years considering 8% inflation. Always consider inflation and invest in instruments which can beat inflation.
2. Investment and insurance are two different things: “Investment in insurance is wrong English”. Insurance is an instrument which is used to cover the risk, while on the other hand investment is done to meet future requirements. If you mix both then you will fall short of insurance corpus and will also fall short of your goal amount. Also insurance as an investment tool is not capable of beating inflation. So it’s better to keep both things separately.
3. Retirement planning is the most important goal: Most of the parents while planning for future gives more importance to child related goals like Higher education and marriage, vacation, etc. They ignore the importance of retirement fund which is most critical goal in any one’s life. Please remember having a retirement plan during your career is one way to ensure a steady cash flow of income when you retire. You can take education loan to fund higher education or can ask your children to fund their own wedding. But at the same time you cannot take a loan to fund your own retirement. So, while planning give equal or more importance to retirement then other goals.
4. Proper Asset allocation is the key to success: Establishing a proper asset allocation is a dynamic process as it plays an important role in determining your overall portfolio risk and return. As we have seen in the above example, how Atul is only investing into insurance and bank deposits. This way he ensures that his portfolio is at minimum risk but at the same time his portfolio will not generate great returns as both the instruments will generate returns which are at par or less than inflation.
Also remember that everyone cannot have same kind of asset allocation. It is based on investors risk tolerance, goals, age and market expectation.
5. Financial Risk management is key: To avoid financial exposure, one should review the current financial affairs and establish adequate emergency corpus and take Secondary health insurance and online term plan. Parent’s health care too is mostly ignored. A sound financial planning requires pro-active management of financial risks.
Above discussed points are well known to most of the investors but still they avoid it and make money mistakes. Most do not even consider hiring a professional for planning. If an investor will follow the rules of investments, the money will follow you automatically. If he or she wants to reach the targetted goals then learn from the past mistakes, the sooner one learns the better it can be planned.
The author is a Certified Financial Planner (CFP). He is associated with GettingYouRich, a Mumbai based financial planning firm.