This article was published on Oct 19, 2015; Money control
It pays to understand the process of creation of wealth. Instead of jumping to buy complex financial products, it pays to go with simple products that you understand and remain invested in it.
Everyone wants to get rich. There are a million wealth gurus out there explaining how a fantastic new fund strategy OR a stock-pick OR a great property coming up OR a new “structured” investment plan is going to turn your hard earned savings into amazing riches in a few year’s time.
Here are some snippets from business newspapers on new products –
“Structured product guaranteed by blah blah ..”
“Smart strategy… assuring higher returns… through buying distressed assets..”
“Cheap financing to buy commodity futures..”
I could go on and on about the examples of complex jargon and products we read or hear everyday.
Psychologists have proven by research that people tend to believe complex worded theories, especially if they do not understand it. If the person making that statement has a fancy designation from a renowned company and wears a smart dress, they will believe it more!
But ask yourself – what do I really need?
Typical needs of 90% Indians are:
• What will I/my family do should I land in an emergency – illness, loss of job, death etc?
• I should have decent amount of savings to afford basic needs – a home, household/family items, money for children
• How can I save some tax?
• Investments that don’t take too much risk and generate long-term wealth for me.
These are not too complex, are they?
One question you must ask – Why does the financial Industry have to make everything so complex and full of jargon?
The answer is simple – If they make it simple, transparent and explain the product properly, you will probably not buy it! The products may be too expensive/ give low returns or comes with high risk!
Simple Wealth means 3 core concepts that you must follow:
#1 Simple Strategies: to fulfill your needs
#2 Simple Products: to action the simple strategy
#3 Simple Review: means that storage and review is made easy, convenient and regular in order to manage the simple products.
One does not need complex products, complex portfolios and complex strategies to make your money grow to decent amount of wealth. Take some interest in growing your wealth, keep it simple and you will feel more in control of your life.
Here are the 10 Rules of Thumb (heuristics) to follow:
1. Before you buy any financial product, ask 2 Whys? a) why am I buying it? b) what is my real need here?
2. Once you know the answer then ask – What is the simplest way can I satisfy my need?
3. Remember: The further the time horizon of the returns, the more sceptical you should be of the assumed/promised returns. Inherently, future is very uncertain. Nobody can predict it.
4. If you don’t understand the brochure, terms or clauses in the agreement avoid buying that product.
5. Do not mix two needs through one product.
6. Ask clearly to the person selling you – what are the risks in this product? What are the fees being charged – written or hidden? Demand clear answers.
7. If you cannot explain product to your mother, don’t buy it!
8. Fewer but better – This principle means one buys less number of products/ Mutual Funds /Shares/ Investments in their portfolio but they do it after proper research and are convinced of the quality(ideally should be best-in-class). This makes it simpler to organise and review and means less paperwork to deal with.
9. Simple benchmarks – How we grow our wealth is always accompanied by the Question – “compared to whom/what”. In this regard, benchmarks give us a scale to compare to.
For example: Equity investments can be compared to Sensex Property investments must be benchmarked to “Expected return after cost of loan” All investments or portoflios can be benchmarked to “Against my goal” Once we develop simple benchmarks, we can compare our investments, portoflios and overall wealth to our own benchmarks (goal amount, expected return, Sensex etc).
10. Be aware of your psychology, temperament and misjudgements while managing your wealth. It plays a huge role in your decision making. Simple Wealth will help you avoid common money mistakes, and keep you stress-free!