FIRST, are you earning enough? Without a fair answer to that question you cannot have any control over your finances. Spending habits and unexpected situations determine how our money is used. Most of us believe we are trapped by these compulsions. The truth might be that we aren’t earning enough. You must have some balances in the bank before your next pay; and you must not be anxious about small unplanned spends. Check if you earn enough. Find ways to do better.
SECOND, do you save regularly? Is there a sum of money you can confidently set aside and not utilise? Can you do that every month? Saving is a sign that you earn enough and you don’t spend beyond your means. Without a reasonable savings your investment journey won’t make much progress. Even if it is a small amount, you should be able to set it aside routinely.
THIRD, are you free of debt? To many this may not be an important goal. The security offered by a steady and adequate income makes it easy to service debt. Easy availability of retail credit has meant that many upgrade their homes, cars and households too often and with great ease. At some point in your financial lives, you must cross that bridge where using money that is not yours yet, seems unnecessary. Credit is the spending of tomorrow’s money today. At some level it is an act of desperation to advance the benefits of a large sum of money that a bank can trust you with. You should outgrow that need at some point in your financial life.
FOURTH, do you have assets beyond your home? Many focus on buying a property as the first major financial goal. Even if it is a chunky and expensive asset, the security of living in one’s own home is important to many. But this ‘investment’ should not subsume every other investment you can possibly have. You might have your PF; some tax saving investments; some stocks and funds; and some deposits. These other assets must grow to be at least equal to your property. Don’t retire with just the house and a paltry amount of other investments.
FIFTH, do you have equity assets? This is an important question and many associate equity with stock trading. Without growth and capital appreciation your investment will severely underperform. Especially over the long term. Do not compromise your wealth for unknown fears about losing money. Trust the benefit of asset allocation and have a portion invested in an index, a diversified fund, or a set of
SIXTH, if you do have equity assets, have you outgrown the need to trade and churn? Stock trading is a great pastime for excitement; not a strategy for financial well being and wealth. You could allocate a portion of your money to punt and to enjoy the adrenaline flow of bets, gains and losses. But do not allow it to overtake your finances in the lure of quick money. Keep it a controlled affair that sometimes generates a chunk you can use on an indulgence of a holiday; and sometimes wipes off the capital hopefully without harming your finances seriously.
SEVENTH, if you are the passive stock or fund investing types, are you holding too much? If your stock holdings are over 50 names, or you have over 20 funds, it is very likely your portfolio performs like the index. Unless you hold a large chunk of a winning stock, disproportionate to other holdings, that index-like performance is the mathematical outcome. If you hold stocks of your employer and that is doing well, you have a winner. Don’t mindlessly add stocks and funds to your portfolio thinking it will do better. It will tend to average out.
EIGHTH, do you hold investments that are not performing? Portfolio review seems like a tough task. Many investors shy away from an annual exercise of looking at their holdings to see what is doing well and what is not. While doing so, many regret investment opportunities they may have missed. That is a futile exercise. There will always be something doing better than what you hold, and there is no way you can forecast and hold the best ahead of time. But what you control is what you have. If you weed out the losing holdings your portfolio will do well. However tough it may be, develop the discipline to sell what is not working.
NINTH, do you actively practice giving? At a point where one has reached a sense of security and satisfaction about one’s finances, many realise that they may have more than they can use. Or may feel the pangs of social responsibility. Or realise the moral requirement to support less privileged relatives or service providers. Are you generous with parting with your money? Do you allow raises for your household staff? Do you behave with magnanimity in a crisis? Make giving your habit, if you have reached a stage of financial comfort. It is a sign that you are not letting money rule your life, but can let go.
It is alright if you have not formally sat down with your portfolio and made major decisions about it. The only discipline is to deploy your money without letting it sit idly. Consider your financial life in smaller and easier to handle tasks. Do not bring them all together to imagine overhauling all that you do. Slow and steady steps to streamline what you have will work for most of us. Keep it simple.
(The writer is Chairperson, Centre for Investment Education and Learning)