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9 personal finance mistakes to avoid

January 08, 2016 15:54 IST

All of us have made these mistakes, so let's begin by seeing how many of them we can avoid/minimise...

I am normally a person who likes to say 'be careful' rather than say 'do not break it'. The mind always sticks to the most important word -- so the 'break' sticks in our head. However there are a few mistakes that I have been seeing and hearing from IFAs, websites, etc. and think it is necessary to summarise them in one place.

1. Optimism

This is a lovely thing to have, except when it comes to investing. When people invest in equities they have some outlandish expectation -- say 28 per cent CAGR (compounded annual growth rate) or 17 per cent CAGR. No clue who gives them such 'lofty' expectations. Yes, some of us have got it in the past, but hey we have perhaps just been lucky.

A Rakesh Jhunjhunwala or a Vallabh Bhansali have got much higher returns, but you have no clue about the efforts and team work that has gone behind all this. A Naren Sankaran (Of ICICI) or a Motilal Oswal is perhaps capable of getting far better returns, but their risk taking capacity and sheer size of funds managed puts a huge limitation to the returns.

So please temper your expectations.

Just because you expect less it does not mean you will not get it. Keep your expectations at a far more realistic 20-25 per cent OVER PPF returns -- so if you get 8 per cent in PPF, expect to earn about 10-11 per cent over a long period of time, tax free. It can do magic to your portfolio over say 50 years like it has done for some of us early starters.

2. Risk and return

The fact that you take more risks DOES NOT MEAN YOU HAVE TO GET greater returns. It is not your RIGHT; it is just that the odds favour you. If it were so certain, there would be no risk at all. Long term can mean really long term -- say 13 years and you may have just lost patience after 12 years and 5 months.

Be very clear that for goals that are 7-8 years away equity is a good investment, but you will need a back up plan just in case it backfires.

3. Consumerism

Buying every shiny thing on the store shelf or on Amazon and Flipkart are not the way to create wealth. When you feel like buying something, wait. Think of the last 5 items that you bought and what you did with that. Clearly the manufacturer and the shop keeper want you to buy all that is made and displayed. It is up to you not to do so.

Investing more and for a longer period is the only route to a great portfolio.

4. Complications

Planners love to complicate things, ignore complex plans. Simpler plans are far superior.

5. Inertia

Good and noble intentions will not protect your family or create wealth for you. So get off your backside and get that term insurance, medical insurance, provident fund nomination form, ...NOW and start your investing programme, NOW.

If you do not believe this, see the amount of money lying in bank deposits, savings banks, post offices around the country!

Even better see your own savings bank account and see how much of interest has been credited. Kickass start.

6. Impulsive actions...

...while in spending, investing, saving, eating and health issues only lead to pain later on. Learn some meditation and act in leisure. Relax, do not get bullied by bankers, contractors, salesmen, cousins, friends, television experts -- by anybody.

Collect all the data, and then sleep over it for a day. Take a decision after a few hours, preferably 24 hours. Do not believe the agent who says "this scheme is closing..." Some agents have been using it for the past X number of years and doing it very successfully. When you have the money, a new scheme is born every day. Usually in a better form.

7. Ask

Ask the people who know before you invest. Parachutes are to be on your back BEFORE you eject from the plane, it cannot be sent to you mid air...

8. Greed

If you have invested in 50,000 shares of a company at Rs 30 a share and the price goes up to Rs 50 in two weeks time, great. Partial booking -- of say 1000 shares every time a share jumps an X per cent is not a bad idea at all.

It is only the owners who can ride a share from its start to eternity -- like a Premji or a Narayana Moorthy can/ will do. Yes there are many theories here, but hey, greed kills more than it makes you go. Be careful.

9. Mess

Do you have 40 items in a portfolio worth Rs 1 crore? You are a mess. You need to have no more than five. Okay make it 8, but not more. So please prune the mess, and clean it up.

Swachcha Bharat Abhiyaan, anyone? :)

Photograph: Adam Kubalica/Creative Commons

P V Subramanyam