Do You Need An Investment Advisor (GURU)?

I remember when I wanted to learn to drive a car, I thought I knew all about driving because I had seen my Dad and all my cousins driving since many years and we had a car in the family since I remembered. I took out our car parked in the porch, and tried to drive. I hit the gate and almost mowed down a couple of passerbys.

My Dad immediately ordered our driver, Nand lal, to teach me how to drive. He was uneducated, an uncouth fellow who had been with the family for a very long time and was always bullying us kids. But he was a master of his field; driving a car. Despite his shortcomings and my hatred of him, he was appointed my Guru or Advisor for driving lessons. 

He took me through the paces. After  some time in a ground, slowly introduced me to the road, then gradually onto the highway and the Hills thereafter. Reversing the Car properly and parking it took some time, but finally I was ready to hit the road without any major mishap. I still remember his driving tips and recollect his memory while changing a punctured tyre. 

Sounds familiar, doesn’t it. The same is the case with investments and a financial Advisor or Guru.

For every field in our life, we need a specialist. Despite an abundance of information and DIY techniques available in the digital world today, a specialist or an advisor is needed, not for more information, but for his skill in interpretation of the information and for his understanding of the dynamics of the various permutations and combinations.

We want to make changes in our house, we engage an architect, an interior decorator, and a structural engineer. For legal matters, we go to a lawyer and for further specialization like tax etc, we approach a Tax specialist. For accounting matters, we need the advice of a Chartered Accountant. For medical purposes, we need a Doctor and for specific ailments, we need the specialists for each field. 

You don’t go to a Dentist for a heart ailment, do you? 

The Great Sachin Tendulkar had a Guru, Nadal & Federer even after winning close to 40 Grand Slams still need the services of a Coach, Amitabh Bachchan also needs a Director to tell him what to do in a movie. We all attend seminars and classes to keep ourselves updated despite the information available on the net. 

For excellence in any field, we need a “Guru”. He tells us the best possible way to go about it, to adopt the right technique, make course corrections when required, to ensure that you don’t injure yourself, to optimize the available resources, to overcome the mandatory volatility and failures we will encounter on the way, for hand holding during difficult times and to help us achieve that little extra on our way to the goal post.

I fail to understand that, why is then, there even a discussion, regarding the need of a Financial Advisor? 

Why do you assume that just because you have generated a surplus in your business or profession, you understand Money and finances completely? How does it make you an expert in Investment and its various options.  

Wherever, we go, the first thing we are asked is, “Tell us something about the market” or tell me, “Which is a good stock or mutual fund to invest in?” 

Our standard reply is, “Sorry, we are not here to offer you a Tip on a stock and frankly no one knows where the market will be in 1 or 2 years.” 

It is impossible to predict the market. 

Advising clients on the type or the specific mutual fund or stock to buy is just a minor part of a Financial advisors job. His role starts with understanding your current Financial Position, Framing your financial goals, deciding your risk profile, Finalising the Asset Allocation strategy, Deciding on a suitable Investment strategy, goal mapping of your investments and finally regular review and couse correction wherever required. Financial Advisor is the conduit between your financial goals and their achievement, someone who helps you reach the goal safely with the least amount of jerks and volatility.

Investment is not all about quantitative techniques and numbers. We are all human and we react to different situations differently. The most common biases in human behavior are the ones related to our money and investment habits . When it comes to money and investing, we're not always as rational as we think we are. Most economic theory is based on the belief that individuals behave in a rational manner and that all existing information is embedded in the investment process but human emotions influence investors in their decision-making process.

Most Common Biases, investors suffer from are :

One of the most harmful biases is the Mental Accounting Bias. An investing example of mental accounting is best illustrated by the hesitation to sell an investment that once had monstrous gains and now has a modest gain. We have reviewed several investor portfolios, who over time have made good money in the market due to compounding or good value buys at one time, but of late their portfolios have been underperforming most benchmarks, but still the investors are not even willing to consider any change. 

Some years ago, my wife and me, started doing Yoga in the morning. We engaged the services of a Yoga Teacher to take us through the pace and ensure we were doing the required asanas in the right way. Based on our goal, the teacher made us do different asanas. After an year or so we could manage the asanas and the routine on our own. The teacher also got married and moved to another location. We decided to continue our yoga sessions nevertheless. However in the absence of a teacher, our attendance fell to below 25% and we soon stopped doing Yoga. The discipline which the teacher brought was taken over by inertia in the absence. That is precisely what also happens in most cases, in investment without a GURU. 

A good advisor will make you invest regularly, hand hold you during volatility and coax you to review your investments and strategy periodically. We tell all our clients to spend at least one hour with us every six month, not only to review how the investments are performing, but also to review the goals if required, performance against financial goals and to take corrective action and do asset rebalancing based on requirements. This is important because our needs or goals are dynamic and not constant.

An advisor is like the google maps. Imagine you are stuck in a traffic jam and you take the easiest available route not knowing where you are headed. Google maps tells you all the possible routes, the possible blockages on the route and how much time you will take to get there by different routes, and different modes. It also warns you in case there is a possible blockage along the route at any time and suggests an alternate route to reach your destination in the least possible time. 

Finally, The following questions should help you decide whether you need an advisor:

·      Do you have a fair knowledge of various modes of investments and keep yourself regularly updated?

·      Do you enjoy reading about investments and doing research?

·      Do you have expertise in investments? 

·      Do you Make emotional decisions related to money and get influenced by the volatility in various asset classes.

·      Do you have the time to monitor, evaluate them and make periodic changes to your portfolio based on your needs and financial goals?

The most common reason for going without an advisor or going direct is the difference in cost and the impact of that in the long run through compounding.

Numerous studies have shown that an investor generally gets an inferior return when he goes direct. This is mainly because his investment journey is shorter. With no one to guide or hand hold, he reacts to the market volatility and also tries to time the market thereby getting sub optimal returns. A good advisor will generate an alpha which is normally more than the cost of an advisor.

Vanguard Advisor Alpha concept in 2001clearly illustrates the difference an advisor can make to your portfolio. 

Finally, I shall like to end with one famous couplet from the Saint Kabir

You will come all across all kinds of experts on the markets in your investment journey. Choose your advisor wisely. Choose a Guru who seeks your betterment even in bad times and during those times makes double the effort to realise the potential. Choose someone who offers a holistic solution to achieve your financial goals, rather than someone who is there to sell you a one time product for his own betterment. 

Consult your Financial advisor, enjoy your investment journey and achieve your Financial Goals.

Happy Investing!

Stay Blessed Forever,

Sandeep Sahni

 

Good Financial Advice?

Exercise regularly, go for a walk daily, don’t eat fried food, no junk, no colas, less of sweets, no smoking, limited alcohol, is sound advice for good health. We all know it, but how many of us follow it.

Similarly, good financial advice is, don’t use credit cards, pay off your debts, start early, consult your financial advisor, make your financial goals, decide on your asset allocation, invest for the long term, diversify, don’t try to time the market, review your portfolio regularly, etc., etc.

A couple of years ago, Jason Swieg, the long term writer of the Intelligent Investor column in the Wall Street Journal wrote, “I was once asked, how I defined my job?” He replied, “ My job is to write the exact same thing between 50 and 100 times a year, in such a way that nor my editor, nor my readers should think that Iam repeating myself.”

Essentially, good advice never changes. It will always remain the same with some minor variations.

There are two kinds of people in the world; one who say,

“To believe it, I must see it first”

And the second, who say,

“To see it, I must believe it.”

The first group will always keep on waiting, avoid risk, be skeptical, try to time the market, withdraw on every correction and wait for results to come before they start, and the second group believes the advise of the financial advisor and follow it. 

Good financial advice is all about converting the first group to the second group. The only way to do it, is to build the faith and conviction of the investor to invest in the right asset class based on his needs and risk profile. 

It is said, “Those who don’t learn from History tend to repeat it.”

We try to build this conviction by studying the past patterns, the history of risk and return, and probability of loss over different time periods of different asset classes. You have to build your conviction so that you are not swayed by the fluctuations and volatility in asset classes. 

However, over the years, there are certain financial truths or gospels that have got established. 

One of the first things you need to learn is to differentiate between an asset and a liability. An asset is something, which generates income, and liability is something, which depreciates over time. A house in which you live is not an asset; a car is not an asset as it depreciates the moment you buy it. An asset is a house, which fetches you rent or a car, which gets you some lease amount.

Next comes the budget you need to allocate to different expenses.

Senator Elizabeth Warren popularized the 50/20/30 budget rule in her book “All Your Worth: The Ultimate Lifetime Money Plan.” The basic rule is to divide after-tax income, spending 50% on needs or essentials and 30% on wants while allocating 20% to savings.

Needs are those bills that you absolutely must pay and are the things necessary for survival, like food, shelter, education etc. 
Wants are all those little extras you spend money on that make life more enjoyable and entertaining.Allocate 20% of your income to savings and investments to take care of your future needs. 

This ratio may change with age, and as you move towards retirement, a greater portion will be allocated to savings and lesser to needs and wants.

Investing is very much like growing a tree; if you can take good care of it at the start, it will take care of itself later. Given lots of tender care, your small baby steps will become your Mighty Money Tree. Your investments in first 5 years, out of a 30 years working life, will generatethe 50% final corpus and the balance 25 years of investment shall make the balance 50% corpus. 

That means the initial 16% tenure makes 50% corpus and later 84% tenure builds rest 50% corpus. Money might not actually grow on trees, unless you plant your own Mighty Money Tree, and early!

So, don’t think there is enough time left, start early and reap the benefits.

Always remember the “Rule of 72”which says, 72 divided by the returns is the numbers of years it takes for your money to double.

       

                                               

Understand the power of compounding. A small difference of 2-3% in returns can make a major difference in your corpus over a 30-year working life.

An investment of Rs 1 lac in a FD giving 6% return will grow to Rs 6.0 lacs over your working life of 30 years. The same investment in a Hybrid Equity Mutual fund giving around 10-12% return will grow to between Rs 17 to Rs 30 lacs and in an equity mutual fund giving a 14-15% return will grow to Rs 66 Lacs. 

A growth journey, ranging from, Rs 6 lacs to 66 lacs, over your working life. 

Your Rs 6 lacs at the end of your working life will not even give you enough for one years requirement. 

Hence, balance your asset allocation between debt & equity and optimize your returns as compounding makes a major difference in your corpus. 

Albert Einstein famously said, “Compounding is the 8^thwonder of the World, those who understand it, enjoy it, and those who don’t, pay it.”

One of the best pieces of financial advice I have received is to “Create a Pipeline”. You need to understand the difference between Active income and passive income. All of us are so focused on our work, that we forget to take care of our money. 

We do not make our money work for us and give us the return we deserve. You can receive Active income only till you are active and the day you don’t work, that income stops. Passive income is income from Dividends, Equity returns, Interest, Rent, Royalty, Franchise Income, commissions etc. 

Today, we recommend to all youngsters to create a financial plan so that by their 40^thbirthday, your income from investments( Passive Income) should be equal to or more than your income from profession or business.(active Income) and then you are ready to FIRE (Financially Independent, Retire Early) and have the flexibility to follow your passion or take a sabbatical or do what your heart desires.

Create a pipeline which can keep serving you with regular alternate source of income during your lifetime and for your children thereafter.

Take control of the two basic emotions, Fear and greed in your investment journey. Be afraid when others are greedy and be greedy when others are afraid and you will never go wrong. Most investors follow the herd blindly and make blunders.

Finally, take care of yourself first. Remember the safety drill by the Air Hostess when you board a plane, wherein she emphasizes that first wear the jacket and the oxygen mask yourself before helping others. It’s the same with money and finances, Pay yourself first before you pay the others, plan for your retirement and your goals before anything else.

Ignore Financial Planning at your own peril. The earlier you start planning and caring for your future, the better prepared and organized you will be to give yourself a head start in life, that could help you achieve financial Nirvana.

Financial advice is very simple and easy to comprehend. All jargon, ratios and graphs are only meant to impress you and confuse you. Stick to the basics, ask yourself the basic questions at the start of your financial journey;

1)  What is your Financial Goal?

2)  Why are you investing?

3)  What is your time horizon? When do you need the money?

4)  What is your return expectation?

5)  How much can you spare and how much do you need to invest to achieve your financial goal?

Consult your advisor, Review your investments regularly, achieve your financial goals and enjoy the journey.

Happy Investing!

Stay blessed forever

Sandeep Sahni