Sahayak Gurukul: Investment Mantras – What not to do in your investment Journey.

Before we started our journey as an IFA (Independent Financial Advisor), it was important to formulate certain basic policies or rules, which were to be sacrosanct and to be followed under all circumstances, the so-called Investment Mantras.

After a lot of study and interaction with investors, we gained insights into the mistakes made by investors in their investment journey and thus decided on the Investment mantras that should be followed – What not to do in your investment journey- for all investors.

1. No Leveraging

One of the schemes, many investors employ to try and get rich quickly is to use Debt to invest, assuming that they can generate better returns than the cost of Debt. Investment is a long-term game. In any downturn, any leverage and margin calls make the investors lose their shirt on the back.

One major lesson investors should learn from Warren Buffet involves leverage.

"When leverage works, it magnifies your gains. Your spouse thinks you're clever, and your neighbors get envious," explained Buffett in his 2010 shareholder letter.

"But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some re-learned in 2008 — any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero.

History tells us that, leverage all too often produces zeroes, even when it is employed by very smart people."

2. Don’t Mix Insurance and Investment

Life insurance is never bought, but always sold. Please make sure you are not being sold a policy but are smartly buying one.

Term plans are pure insurance products, which are the cheapest, and the best way to buy a large insurance cover. However, many people refuse to buy them because they don't get any money from term plans at the end of the term (or maturity in insurance parlance).

Instead, they prefer insurance products with savings or an investment element such as traditional endowment or money-back plan or more sophisticated stock market-linked ULIPS. These products pay back the premium with returns earned from investment at the end of the chosen term.

But, The entire amount you pay to the insurance company is not what is invested. The premium you pay has three components.

a) Expenses (including commissions earned by the agents as well as expenses and distribution costs).

b) Mortality premium

c) Investment amount

And, to top it all, the amount permitted, to be invested in equity may just be around 8 to 10 per cent of the total investment. So one cannot really expect a great return from their insurance product.

Moreover, the money may sound good now but may not be that great when you finally get it. Let's say you are promised Rs 1 crore 20 years down the road. Taking inflation at 8 per cent per annum, that would be worth around Rs 21 lakhs in today's prices.

Typically, an Endowment policy will charge you a higher mortality premium and give you a return of not more than 6% compounded over a typically 20-25 year period.

 Just to illustrate, the details and returns, of a 25-year endowment policy for a 30-year-old, non-smoker, versus a term insurance of the same amount and SIP in a Equity MF for the balance amount, are mentioned below:

3. No short cuts & speculation

The most important strategy in investing is not small cap or large cap or any other cap but long term. The only way to make money is through long term investing and power of compounding. Nothing else works. Please don’t take any short cuts. No tips; Tips are for waiters and serving staff, surely not for investment. Most Tips are with a vested interest and will reach you once the story is over. They don’t have your interest but the “Tipper’s” interest in mind.

4. No Lock In products – Importance of Liquidity

The reasons you invest in Mutual Funds are better post tax returns, professional fund management, diversification, low-ticket size, etc.

For me one of the major reasons as compared to other asset classes is Easy and hassle free Liquidity and the ease of transactions sitting anywhere in the world.

Closed ended or lock in products are generally sold on the premise of higher returns but most products fail to deliver the Alpha to justify the lock in.

Hence, as a rule, we do not recommend products like close ended funds or any such product which compromises with liquidity.

It’s your money and you should have the freedom to decide what to do with it.

The only exception to the rule is ELSS, which comes with a 3-year lock in but gives you the benefit of Sec 80 C deduction and also has the lowest lock in period for any investment under Sec 80 C category.

5. Don’t try to time the market

Investors often spend a lot of their time in trying to identify when the market is very low or high, and try timing the purchase and sale of investments accordingly. They want to time their exit, when the market touches its peak and to time their entry, when the market has touched bottom.

Statistics show that no one can consistently time the market. Instead of that, a better strategy is to stagger your investments through SIP (Systematic Investment Plan), STP (Systematic Transfer Plan) and withdrawals through a SWP (Systematic Withdrawal Plan) and stay invested for the long term.

6. Follow the Hierarchy of needs

As humans, we have a hierarchy of needs, a theory propounded by Abraham Maslow in 1943 wherein he has said a lower level need has to be satisfied before one can move on to a higher level.

Essentially, the needs can be classified into deprivation or deficit, safety and finally growth. Individuals must satisfy lower level deficit needs before progressing on to meet higher-level growth needs.

Similarly while saving / investing, the “hierarchy of needs” has to be kept in mind.

The basic requirement needs to be fulfilled before you move on to your aspirational and legacy goals.

Just to simplify things, financial goal setting needs to follow a hierarchy, as that will not only decide the amount of investment but also the desired asset allocation strategy.

If you haven't put emergency cash in a savings account, then don't buy term insurance. If you don't have term insurance yet, then don't start putting away money for your daughter's college education, not enough planned for your retirement, stop thinking of all the aspirations, and so on.

7. Don’t try & go Direct or without an Advisor

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

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

b) Do you enjoy reading about investments and doing research?

c) Do you have expertise in investments?

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

e) 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.

Follow the investment Mantras for the best results.

Consult your financial advisor and start your investment plan to achieve your goal.

Stay Blessed Forever!

Happy Investing!

Sandeep Sahni