Money Matters : Financial Decisions

In an interesting survey by Northwestern Mutual in the US, multiple generations were polled on their propensity to provide Financial advice to others and the variations of such advice across generations. The most interesting part of the results is the section on what was the best financial decisions the respondents ever made. These are the top six and as relevant to us as anything you've heard or read on Financial Planning.

1. Started saving early.

How many of us actually do this? I meet a lot of people in the early stages of their careers and this is advice that I always try to pass along. No doubt as Indians, we definitely will go down this route as compared to Americans; but with changing lifestyles and demographics, it is almost a given that savings level will tend to drop and even more so at early stages of careers. If you look at the propensity to spend among young people in Bangalore as an example, especially those in the first two to three years of their career, you cannot but notice that.

Build a nest egg and start with your first paycheck.

2. Bought real estate at a good price.

Tough one, this. Owning what is a primary residence needs to be a priority and the earlier the better. Given the amount of leverage this will entail for most people and the fact that careers often mean transfers across India, this tends to be the biggest financial decision that most middle class people end up taking. Given the regulatory framework and the way builders operate, it is also the riskiest. However, it is one that needs to be planned for as a priority.

Here's an alternate take on home ownership in the aftermath of the crisis.

3. Made sure that my family is protected.

What does this mean? In financial terms, the following at the bare minimum.
- Are your primary breadwinners adequately covered in terms of life insurance?
- Are your assets - residence, vehicles, property - insured?
- Do you have adequate Medical Insurance for your family?
- Do you have sufficient liquidity (cash or near cash assets) to tide over exigencies; loss of job, unplanned  
   expenditure, etc.?
- Are all your family assets covered for succession; do wills exist?

4. Bought products with guarantees (insurance/annuities).

This is actually linked to point 3. It entails investing in products that will provide a deterministic cash flow to your family in case the primary source of income is lost (death, loss of job, etc.) or post retirement. Examples of such investments in the Indian context are Insurance Policies (cash back), Pension products, Government Debt Products, PPF, etc.

5. Relied heavily on my 401K.

The 401K is a retirement scheme in the US. The equivalents in India are one's investments in the Provident Fund, PPF and Pension Schemes. Put aside a bit every month and forget about it and you will find that the sum is quite substantial when you need it.

6. Rebalanced my portfolio consistently.

I am not sure about this. Most people do not have the expertise, time or even the inclination to re-jig their portfolio periodically. You could use a Financial Planner's services or a Wealth Management Service to help you do this but I have not seen any empirical evidence to show that people using such a service are better off in the long run. From what I've seen, it works well enough if you do sufficient research to moderate your risk, be consistent in your investment strategy and not trade potential long term benefit for short term gain.

Surprisingly there is not much mention of equity as an investment class in this list. In fact, 1% of the respondents indicate that not investing in stocks is the among the best investment decisions they ever took! Given that this survey is conducted during the downturn and the blood letting and volatility that we've witnessed on Wall Street over the last year, this may not be surprising. However, the simple fact is that as an average investor, you will not generate adequate returns over the long run without equity in your portfolio.

The key to understanding any advice about Financial Planning is that the theory is built on mathematical / statistical techniques. This means that what applies to the population as a whole does not necessarily materialise for individual investors. That is where luck kicks in. One can at best plan logically and leave the rest to fate. As Indians, that is a concept that we should be able to grasp especially easily!