Do you know your financial comfort zone, and are you in it?

Published: July 24, 2015 at 9:35 am

Last Updated on January 2, 2016 at 8:57 pm

Type ‘comfort zone’ in Google and you only find articles that tell you to step out of it. So why am I asking you to step into it?!

If financial literacy was a course, it would have an extremely small syllabus:

1) Understand the impact of inflation and design a way to combat it.

2) Insure yourself (family) against unexpected events while you are engaged in the above.

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That is it! There are other aspects, but there is no flaming hurry to get to them.

Some people choose equity to combat inflation, and some would like to use only fixed income products. As long as the latter group makes up for the lower return by investing more (which they typically don’t), there is no problem.

It is personal finance, and it is immature to think what we do is superior.  Question is are we doing, what we are doing after with a 360-degree view. This  includes the realization that one will have to invest a lot more if only fixed income has to be used, which is not an efficient way to make money work for us.

If we can convince ourselves that we have considered all aspects of a problem,  we can pretty much lock ourselves up in our comfort zone.

That said, I did not write this post to justify the use of fixed income instruments for long-term goals. I write this to address regular readers who are well aware about the need for equity investing.

Let my try and make my case with two instances.

1)  In Oct. 2014, I met Subra for the first time at the IFA Galaxy conference. We were joined by institutional fund manager Yogesh Sundaram (yes, the guy who quotes Taleb in Subra’s FB posts). He started to tell me about how XYZ stock is a multi-bagger and explained his statement with some metrics.

This was a couple of months before the release of the automated stock analyzer. So I did not understand what he was saying, but felt it would be impolite to interrupt. Subra stopped Yogesh, stating ‘Pattu does not do direct equity’.

I apologetically started saying that I had (have) trouble understanding a business  etc.

Subra stopped me mid-sentence and said, “If you are not comfortable, do not get into it”.

Here was a man who started investing in stocks in school, before the Sensex came into being. His CAGR (sorry, XIRR!) is about 3 times of what I usually assume in a goal calculation.

He did not make a song and dance about ‘how direct equity is the best wealth creator’. How it is better is than mutual funds, blah, blah, blah.

All he said was, do what you are comfortable with.

2)  Dr. Uma Shashikant spoke about return on equity drivers at the Mumbai investor workshop on Feb 1st, 2015. Subra was seated next to me busily taking notes 🙂

She began her talk by saying,’although my thesis was on equity markets, most of my equity exposure is in mutual funds’. My stock portfolio is small and is mainly for fun and learning.

She went on to speak about ROE drivers with extraordinary clarity, seamlessly switching between qualitative and quantitative metrics.

If such a person, who is more than competent to pick stocks, chooses not to have a full direct equity portfolio, what does that tell us?

To me, it says loud and clear,  do what we are comfortable with and focus on things that we love.

That is what the title means: Do you know your financial comfort zone, and are you in it?



3) Take the case of the monk who runs AIFW*. All he does is, invest in two mutual funds (+ small direct equity exposure) completely disregarding star ratings and comments like ‘Prashant Jain’s funds are underperforming’, ‘Quantum is hold cash’ etc.

He knows exactly where his comfort zone is, and  is right inside.

Ultimately it boils down to confidence.  Do I have the confidence to ignore the rants around me and stick to what I am comfortable with (assuming I know what it is!)

So many people are searching for the best or optimal method that they have no idea what a comfort level stand for!

Many people have asked me, “should I invest in direct equity along with mutual funds?”

Personally I feel that I will not be able to shut out the noise if I invest in direct equity. Mutual funds are a much simpler and calmer choice for me, allowing to focus on things that I love.  As far I am concerned MDBSC rocks! There are those who think that I (and other MDBSCers) are crippled by fear. Who cares! We have better things to do.

Some simple thumb rules that have worked well for me:

a) do not listen to anyone who says what they do is best or something must be done in a certain way. There are multiple solutions to most problems in life

b) understand the underlying idea and implement it in a way that you are comfortable with.

c) the simpler the solution, lower the maintenance!

The same argument applies to DIY vs paid advisory. Confidence is again key. Those who have it recognise that even rocket science is not rocket science and manage their own finances. Those who don’t have it better seek professional help.

It is all about finding one’s financial comfort zone and staying in it.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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