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Things you need to unlearn about managing investments

In this post, we touch upon financial notions that slow down people’s financial journeys

November 19, 2018 / 07:47 PM IST

Moneycontrol ContributorDev Ashish

Being in the investment advisory space, I regularly come across preconceived notions that people have about investing or other aspects of their personal financial lives.

Some are reasonable while others aren’t. But sadly and quite often, some of these notions are the exact roadblocks that slow down people’s financial journeys.

In this post, I try to touch upon such notions, which demand some unlearning:

SIP investing is risk-free and guarantees no losses

For small investors, SIP is still the best way to slow and steady accumulation of equity. But SIP only allows investing systematically in both rising and falling markets. It does not guarantee anything or eliminate the risk of loss, which is inherent to equity investing. But no doubt if one keeps investing for long enough, then the probability of capital loss is greatly reduced.

CAGR of 12 percent means you get 12 percent every year

Wrong. CAGR of 12 percent means that the average return for the chosen period is 12 percent. This does not mean that you get 12 percent every year. Equity returns are highlighted using CAGR figures. But returns can and will fluctuate every year. So for a 10-year period, it’s possible to have a sequence of annual returns like 27 percent, 5 percent, -18 percent, 37 percent, -20 percent.... and so on, which might result in average return (or CAGR) of 12 percent.

Insurance is investment

A big no! This is one of the biggest myths that should be unlearned as soon as possible. Every year, lakhs of people get baited by the appeal of tax-saving and end up ‘investing in insurance’. Both insurance and investments serve different needs. If the two are mixed (by buying traditional plans like an endowment, money back or whole life policies), then you will neither get good returns nor get good insurance cover. Simply put, insurance is to ensure that your dependents get sufficient money when you die. And investments are made to ensure that you beat inflation and have enough money for your goals.

Investing is only about achieving highest returns

What could possibly be wrong about that? If you have financial goals (like children’s education, house purchase, your retirement), then I believe that the final measure of success is not about getting the highest possible return. Rather, it’s about meeting all your financial goals on time. Imagine telling your children that you were able to beat Sensex in most years but still could not save enough for their costly higher education. Sounds like a victory not worth celebrating. Isn't it? Generating good returns from investments is important but not enough. You need to save enough and start saving early to increase your chances of achieving your goals. Remember that in real life, risk of investing is not volatility. It is not meeting your goals.

It is too early to begin saving for retirement

The dynamics of employment across sectors is changing. People may be forced to retire earlier than age 60 due to the advent of technology, availability of cheaper (human) resources and inability to stay relevant. So you never know when you might have to retire early. So, the earlier you start your retirement planning, better it is. This is all the more important in the absence of social security benefits that were available to previous generations (like pension, etc.)

Diversification is unnecessary

Diversification is boring but necessary. Being 100 percent in equity or 100 percent in debt suits only the perfect timers - a species that does not exist. So for more real-life investors, it’s best to avoid taking big skewed bets. It will put your financial future at risk and at the mercy of just one asset class. Proper diversification strikes a healthy balance that ensures good growth without taking unnecessary risk.

If new information is available, I need to act on it

Technically, this refers to the availability bias - which really means relying on the information you have at hand even if it's not useful for decision-making. All information should not be acted upon. Also, ‘not doing anything’ is also a decision. And quite often, it works pretty well in personal finance.

You simply need to identify your goals, create a strategy (choose a proper asset allocation, investment products, rebalancing tactics) and then stick to it. There will be tons of noise (or you may call it information). You just need to ignore most of it. Easier said than done. But that’s what should be done.

As you might have guessed, this is not a comprehensive list of things that should be unlearned. There are several others. But I hope you get the drift that just learning new things is not enough. There are some things that we already know but which aren’t right. We need to ask tough questions and if need be, unlearn those things. It’s rightly said that our ability to do well in future depends not only on how well we learn but also on how well we are able to unlearn.

Moneycontrol Contributor
Moneycontrol Contributor
first published: Nov 19, 2018 07:47 pm

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