Last Updated on April 20, 2021 at 12:22 pm
Many of us struggle with money management decisions because we are judging “right vs wrong”, “good vs bad” with incorrect benchmarks. Our definition of what is simple and what is complex in personal finance is also incorrect. If personal finance is more personal than finance, then simplicity in personal finance is also personal.
When we hear about where a person has invested or the number of stocks or mutual funds they hold, we form opinions by instinct whether their money management is elegant or complex. These are often incorrect.
For example, Facebook group Asan Ideas for Wealth founder Ashal Jauhari is often asked, “How many mutual funds do you invest in? What are they?”. He is almost never asked, “what is your asset allocation?”
So Ashal has always held two funds for quite a while now and he has recently switched from active to passive funds. This seems like the very definition of minimalism in personal finance.
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Not so fast. I know many others who hold just two passive equity funds. At least half of them are clueless about risks, asset allocation and portfolio management. For example, choosing one equity index fund for a five-year goal is not minimalism. It is ignorance.
“Keeping it simple” in personal finance only means identifying your needs and satisfying them with informed decisions. Here informed decisions refer to an appreciation of underlying risks and a method to manage them.
How you choose to go from point A (these are my needs) to point B (I now have enough money for my needs) is up to you. There are a zillion ways to do it. The problem is, we need reassurance that what we doing is the best. So much that people forget their own needs in searching for the best. This is not possible.
Ashal’s money management is simple because he has a clear understanding of where he is and where he needs to go. Not because of the number of funds he holds. His money management plan is completely customised. it is this customization that drives simplicity in personal finance.
People are amazed that Ashal does not have a PPF account. That is because they never bothered to find out his asset allocation. If they did, they would realize it would be a mistake for him to invest in PPF. We are incapable of contextually defining simplicity.
Two funds, three funds, four funds, active funds, passive funds, a mixture; how does it matter as long as the investor is clear about their own needs, their own temperament, has a plan to achieve their goals and most importantly sticks to it.
Simplicity may be the ultimate sophistication but simplicity itself is an arbitrary definition. What matters is how refined our definition is, and how faithful we are to that definition.
Building that definition is so hard because most investors are distracted by new products and information: “XYZ AMC is coming up with a new NFO, so let me buy it because I like the AMC”, “some guy on Twitter with a tick on his profile said the market is overvalued, so should I stop my investments?” The list is endless unless we end it and build a plan that is suitable for our needs and stick to it.
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