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

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.

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?

Financial-noise

 

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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43 thoughts on “Do you know your financial comfort zone, and are you in it?

  1. Great post, finding your comfort zone is the key to gaining financial stability. There are just so many instruments, stratergies, plans to invest, one can easily get lost. Start at a level you are confortable at, and gradually move the comfort zone, as you read and understand better.

  2. Great post, finding your comfort zone is the key to gaining financial stability. There are just so many instruments, stratergies, plans to invest, one can easily get lost. Start at a level you are confortable at, and gradually move the comfort zone, as you read and understand better.

  3. Sometimes the hardest thing to do is to do nothing and in many cases it is the wisest thing to do.

    Guru Pratheek 🙂

  4. Sometimes the hardest thing to do is to do nothing and in many cases it is the wisest thing to do.

    Guru Pratheek 🙂

  5. 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 your are engaged in the above.

    That is it!

    Superb! You nailed it!

  6. 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 your are engaged in the above.

    That is it!

    Superb! You nailed it!

  7. Yes, another excellent post 🙂 .. I think i know my comfort zone 🙂 Hope i will achieve my FI with it

  8. Yes, another excellent post 🙂 .. I think i know my comfort zone 🙂 Hope i will achieve my FI with it

  9. I agree with you 100%. Directly meddling with stocks sucks away a lot of useful time, causes stress ( blame trade rags and channels which glorify trading). I have observed that 50-60% of the cash invested in trading is locked up since the stock has gone down. My returns from trading over the past 6months? 10% annualized. Not worth at all….on a long term . I am doing that (direct equity) to just learn. Scoring 30-40% returns with trading is impossible unless one has access to insiders.

    It may be the best route for many of us to pick some good direct MFs and enjoy our life and reap. This article reinforces that conclusion of mine. Thank You, Sir.

  10. I agree with you 100%. Directly meddling with stocks sucks away a lot of useful time, causes stress ( blame trade rags and channels which glorify trading). I have observed that 50-60% of the cash invested in trading is locked up since the stock has gone down. My returns from trading over the past 6months? 10% annualized. Not worth at all….on a long term . I am doing that (direct equity) to just learn. Scoring 30-40% returns with trading is impossible unless one has access to insiders.

    It may be the best route for many of us to pick some good direct MFs and enjoy our life and reap. This article reinforces that conclusion of mine. Thank You, Sir.

  11. dear sir
    u summarized
    financial planning in 2 steps. true to the core . keep posting
    drteny

  12. I’m a plain, boring ordinary man. Miles away to reach to become a Monk.

    But honestly speaking, such statemrnts from people like you, gives a KICK (Salman khan’s Kick) to EGO. 😛

    Loving it.

    Thanks

    Ashal

  13. This is like, if I can say so, targeting right on Shiva’s third eye !! so true pattu… the comfort level of each individual, stressed by you, is the cornerstone of all decision-making in life and financial affairs is no different. in fact, the comfort zone factor has higher connotation in this matter !! I always tell people with a simple example developed by me – If 2 persons go to a doctor with the same cough/cold/fever ailment, yet it is possible that good diagnosis may warrant different treatment and medication for each of them. the same applies to our financial situations and corresponding solutions !!

    as you said, if a person can invest a large amount to take care of all his needs and want to stick to only debt instruments, any so called expert need not comment that such investor is imprudent in not investing in equities. who knows, the investor may have risk aversion as a higher priority and he has his best reasons for his choices !!

    well said, pattu…

    chellamani

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