How we love to follow successful people, even in personal finance matters! Recently, I was part of a panel discussion of a company that had corporate and internal participants (CXO level employees), who spoke about their financial journeys. I spoke about what needs to be done for individual financial well-being. The company is well-known and employees have made windfall gains through their stock options, vested over the years.
While the panellists concurred on the mistakes of their early financial life, some of the suggestions on managing money were really off target. The sad part was that employees were veering towards their seniors’ advice over thinking practically. For example, one of the panellists exhorted beginners to buy any stock from the Nifty through a zero-brokerage platform, as their first investment, adding that Nifty was risk-free!
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Varying risk profiles
The problem with taking advice from wealthier people is that they have much more funds and, hence, the ability and buffer to take more risks. Twenty years back, wealth gained from employee stock ownership plans (ESOPs) was used to build financial security and the focus was on conserving your corpus. Now, however, ESOP wealth is used to invest in start-ups or stocks and, while this sounds exciting, it is certainly very risky. These exclusive investments are not available to the average investor. So, there is no point in tracking them.
The financial needs and approaches to fulfilling these needs also differ for the regular salaried versus the rich. Also, it is easy to forget money problems normal people have. If your net worth jumps from Rs 1 crore to Rs 15 crore due to ESOPs, certainly you would have the ability to spend more.
One of the panellists talked about using money intelligently to fund experiences over buying things. Being successful in a profession and rich doesn’t automatically make you an intelligent investor!
These days, financial advice is given on traditional media and there are innumerable videos on social media. There are many social media finance celebrities – star fund or PMS mangers, journalists etc. – who command a big following. There are also bloggers without any finance background, whose claim to fame is having managed their own money well. Recently, when RBI allowed retail investors to directly buy government securities, finance stars hailed this as a landmark move and a great investment for retail investors. It is a safe investment, no doubt. But it gives very low inflation and tax-adjusted returns. Certainly, it’s not a viable investment for small investors. An investor wanting to take exposure to government securities can do so through a short-duration debt fund, which will be more tax-efficient and less concentrated in one type of bond.
Simple products do not excite
No one is excited by financial advice that propagates simple products or provides easy solutions to investing. The exciting stuff is what attracts. So, if Elon Musk is investing in bitcoin, there are innumerable shows/ videos/ articles on bitcoin that get lay investors to jump in as well. A similar story played out in small caps a few years back, led by an ace investor.
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Taking advice from the rich and the famous at best adds to your knowledge. Not every recommendation can work for you and this is because each person’s financial situation, risk-taking ability and financial goal are different. Blindly following such advice is the shortest road to ruin. It is easy to emulate the entry strategy, but the exit route is not followed. There will be enough times when popular investors would have exited at a loss, but obviously will not talk about it.
Investors need to think about their financial goals and work with financial planners who can take them to the next level. There is no shortcut to managing money. Find an advisor who has more than 15 years of experience. Follow people who have experience in handling investors’ wealth and are not just armchair theorists giving opinions in the media. Look for people who simplify matters and give practical ideas on how you can achieve goals instead of complicated strategies. Take what finance celebs and people richer than you say, with a pinch of salt. After all they hardly recommend low-fee and relatively lower risk investments.