Financial Planning is Simple but Overwhelming Part 2

Published: July 7, 2023 at 6:00 am

Last Updated on July 7, 2023 at 11:33 am

Yesterday, fee-only SEBI-registered investment advisor, Ajay Pruthi explained why financial planning is simple but often overwhelming. Today he explains a way out. Ajay can be contacted via his website

For the sake of continuity, let us take a look at the last example discussed by Ajay once again.

Suppose you have never invested in equities or a very small part of your portfolio is invested in equities. All your investments are in debt instruments. Your friends who are investing in equities keep boasting to you about their returns from equities – 10% or 12% or 15% and you start thinking that you are only getting 6% to 7% from FDs. Should we move to equities now? Should we have invested in equities long back? (This situation is mainly with conservative investors).

The typical overwhelming situation with an investor who is thinking to start goal-based investing and try using online calculators is as follows:

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Retirement Corpus – 6 Crores, Monthly investment required – 40,000 in addition to ongoing PF, NPS etc.

But I am earning only 70,000 to 80,000. What will happen to my dream house purchase goal, what will happen to my dream of sending my child to any foreign country for higher education? Though these goals may be achievable based on the time frame and priority of goals, the situation is overwhelming at this point in time.

Finally, when you combine all these points, it becomes very difficult to understand them collectively. You might experience a sense of confusion, things may not appear clear, there is nobody for you to approach and there is no one to give you a proper solution. The idea of financial planning is now dissolving and the hope of achieving anything is doubtful. What can be done? Is there any solution?

Do Financial Planners have a solution for the same?

The answer is both Yes and No.

If you are thinking that financial planners have solutions to all your problems, the answer is NO.

No financial planner can give you a 100% guarantee that your insurance policy claim will be settled. They will help you in choosing a product with better features and help you decide what additional features/riders to purchase in an insurance policy but they cannot give you a 100% guarantee that the claim will be settled. 

The only way to increase your chances of claim acceptance is to declare everything honestly while filling out a proposal form.

Investments – Can any financial planner give you the assurance that their suggested mutual funds will give you the highest returns? (Please run away from the planner who gives this type of assurance) The answer is No. Financial Planners can only help you in assigning the amount of monthly investment required to achieve your goals, equity/debt allocation, instruments to invest equity/debt, and rebalancing.

Above all, an important part of financial planning is that financial planners help you to manage your emotions in turbulent times. 

Can you do better than a financial planner for your investments – Yes, you can definitely do that.

Can you manage your emotions in turbulent markets? Can you manage your emotions while shifting from equity to debt when your goals are 2-3 years away and the equity markets are giving double returns than debt instruments? 

If you are secured with insurance policies, have proper asset allocation, and can manage your emotions, you do not need a financial planner.

I am not convinced about hiring a financial planner. I am convinced about hiring a financial planner but not convinced about the amount of fee. What should be done?

Is DIY the ultimate solution?

The answer is again Yes and No.

Every profession needs time. Whatever profession you are working in, you must have taken time to understand it better and then you keep getting better. This is true not just about personal finance but for every profession.

If you have time, please start learning personal finance by picking up topics one by one. Do not try to do everything in a single day, week, or month. It will take time. Start with the topics of security i.e., insurance because you have to purchase the policies first. Then start learning about investments.

Check if it is worth learning everything about personal finance. It is all about the time and value of money. What will give you better scope in life? Learning personal finance and earning 1% to 2% extra returns or improving your skills and earning 10 to 15% extra and investing more. If you are spending 2 hours daily on learning personal finance for the next 6 months and the same 2 hours can help you boost your career where you can increase your salary by 50%, I think the 2nd option is better. But if you think, the first option is better. Again, the choice is yours.

I am not against DIY, in fact I am in favour of it. But at the same time, I believe that your skills can help you to get much better returns in your life than being a DIY investor.

And I truly believe in that. Think about it, how many investors you can count on your fingers who have made wealth by learning only investing? – Warren Buffet, Charlie Munger, Rakesh Jhunjhunwala. You can try thinking and adding 1 or more names. Now think about people with their skills – Mukesh Ambani, Jeff Bezos, Elon Musk. I am deliberately adding 3 names in both. Just check, how many additional names you can add to both lists.

Secondly Warren Buffet, Charlie Munger, Rakesh Jhunjhunwala – These are the people who have the skills of investing. They were not trying to be DIY and earn extra 1%-2% returns, they had the right skills in investing.

What is the ultimate solution?

The solution lies somewhere in your financial planning journey. 

  1. If you are thinking of financial planning and have no clue about how to define goals, or which insurance to buy that means, you are overwhelmed by financial products. Hire a financial planner in the beginning. It will help you in 3 ways- 
    1. It will help you to select products with better features and will help you in asset allocation.
    2. It will also help you to understand to avoid the products which may not be suitable for your financial journey in future
    3. It will further help you to get rid of existing bad products if you have any.
  2. Now, you already have a financial plan in place with all the insurance and investment products. Start learning personal finance if you want to become DIY and it is going to be very easy to become a DIY in a span of 3-4 years and I will tell you the reason for it.
    1. You will not require additional term insurance suggestions in the future (in most cases) unless there are some additional goals.
    2. You will not require health insurance suggestions in the future. 
    3. You will not require personal accident policy/critical illness policy suggestions in the future. 
    4. There may not be much need to change any debt investment requirements as you keep investing in products like PPF, VPF, Sukanya Samriddhi scheme, FDs, etc. which are secure and few are tax efficient too. 
    5. All you need to do is to check the performance of your equity mutual and rebalance if required. You do not even need to check the performance if you believe in index investing. In that case, you just need to rebalance.

Once you are on track to achieve your financial goals with proper asset allocation, you may start investing more in equity instruments for creating wealth. 

  1. If you are already a DIY investor or have already achieved your goals, continue the same way.

If you are one of those who already have made some mistakes during the financial journey, keep one thing in mind, everyone makes mistakes in their financial journey. You are not the first one who lost 5-10 Lakhs in the stock market and you will not be the last one. You are not the first one who is stuck in any of the investments like a home purchase (where you have not got possession), or any other financial product and wants to come out of it and you will be not the last one. Accept it, move on and try to make better financial decisions. 

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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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