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Home > Business > Special

How to take good financial decisions

Amar Pandit | October 22, 2007

Here is a trait that is common to many of us. Waiting till the very last day to file our income tax returns or rushing to invest in tax saving in January or even March-end. - I am sure that all of us has either experienced this or know someone who had undergoes this experience on a regular basis.

The basic fact is that the more time you have to complete a task, the less pressure you feel to do it now. And eventually it ends up either not being done at all or there is a last minute scrambling to get it done.

One of the major financial mistakes that I see lot of investors commit is the mistake of inaction. It is not always what you do that hurts you financially but also the things that you did not do that hurts more. This theory is called 'decision paralysis' as it is primarily responsible for this financial blunder of inaction.

Let us look at Anil Kulkarni whose inactions have been costing him more than his actions. He advises people that they should look at the objective before making any investment decisions but doesn't flinch his eyelids even once before taking a Club Mahindra membership (by shelling out a couple of lakhs), something he has not used for last several years.

Here are some of his other gems. When home prices had just starting rising, he was looking at buying an apartment. He was advised that if he was planning to stay in that apartment then he should go ahead and purchase it now. And that was a good four years back when the prices were not so atrociously high. But then he kept on negotiating till the flat that he had liked was sold to someone else.

He started his hunt again and got on the negotiating mode and ended up losing the another deal. By this time, the prices had shot up 75  per cent and a harder interest rate regime was beginning to rear its head. And since that happened he decided to wait till the prices as well as interest rates fell.

Today, the prices are up almost by 250 per cent and interest rates by 4 per cent. After several frustrating discussions with his wife, he has finally bought a house at current levels. Surely, it does not require one to have a 150 plus IQ to figure out that his loss in terms of opportunity cost was significant. But he continues with his mistakes.

There is another horror story to be told when one looks at Kulkarni's investment decisions. For starters, he decided to invest by speaking to his brother, friend, chartered accountant, mother, banker uncle, broker, private banker, financial planner and also the neighborhood paanwala about which stocks and mutual funds to buy. Then, unconvinced by any of their arguments he decided to do some research himself.

So, he watched business channels and read newspapers which, at that time, were saying that the Sensex was overvalued at 10,000 points. Now, at almost 18,000 points, he is still waiting for the Sensex to 'correct' itself.

Here are a few examples that will give you an indication if you are afflicted with 'decision paralysis':

  • Delay making investment decisions
  • Cannot decide between investment choices to be made. Even after you have invested, you are still confused
  • Wait for the market to fall to buy stocks and equity mutual funds but never end up buying at lower prices because you want to buy at the lowest price
  • Speak to ten different people before making purchase or investment decisions but end up doing nothing will all that information

Follow these rules so that you do not fall in this trap. 

Invest through systematic investments every month and take advantage of rupee cost averaging, if you feel that you are unable to decide whether it is the right time to invest.

Ask yourself what could happen if you do not take a decision today and what could happen if you do take the decision today?

No, this is not to say that you should jump into decision-making. But there should definitely be a cap on the time period to decide. It is important to note that you will certainly be in a much better position even with an imperfect decision sometimes instead of no decision.

For instance, even if you had bought the worst-performing mutual fund four years back, you would still have doubled your earning as compared to returns on your fixed deposits or post office investments.

As Mark Twain once said  "Twenty years from now, you will be more disappointed by the things you didn't do than by the ones you did do". And that holds true in your financial decisions as well.

The writer is director, My Financial Advisor

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