IF YOU FAIL TO PLAN, YOU PLAN TO FAIL
1. Not setting financial goals
a) Every investor has different long-term financial goals, based on current status, income, risk profile and investment horizon, and laying them out is a simple exercise.
b) Those who consciously plan out their goals are usually more empowered, create more suitable portfolios and increase the odds of actually achieving their long-term goals.
2. Short-term mindset
a) Meeting long-term goals involves a long-term strategy, but investors who want to make a quick fortune take short-term high risks, and face the prospect of losing their capital over a period of time.
b) Patient investors have greater visibility over future portfolio movements as they prefer stable returns over a longer period, and they invest in long-term themes in well-researched ideas.
3. Pre-tax myopia
a) Investors often look at gross return, not calculating how much they really get to keep after taxes.
b) Investments have different tax rates and one should always compare “post-tax” returns.
4. Inadequate understanding of risks
a) Credit interest rate and concentration risks are inherent in markets and all investments carry them in different proportions.
b) Common precautions like diversification, low modified duration, investing in high rated companies, etc, are tools investors should use to protect their capital.
5. Inadequate product knowledge
a) Investors often lose money in a product they thought was capital-protected.
b) Investors who question, query and understand products they invest into often turn out to be better investors since they understand how these investments will behave in different situations.
6. 'Fill it, shut it, forget it' mindset
a) Investors often don’t take the time to review their portfolios, although markets are dynamic due to variables like interest rates, GDP growth, inflation, exchange rates, crude prices, etc., which affect investments.
b) Investors should review their portfolios once a quarter and align the same to market movements, thus reducing chances of being caught by surprise after two-three years.
7. Not calculating the cost correctly
a) Very few investors factor in inflation (or even rupee depreciation) while setting their financial goals, and get surprised how inflation can impact even short-term goals, leave alone long-term goals like retirement which may become penurious.
b) The rate of inflation which you should assume while setting an accurate long-term goal depends on the goal itself, like 15% for healthcare costs, 12% for education expenses, and 7% for long-term effective inflation in general, to find its future value and aim to save a little more for your goals than the anticipated value.
8. Not choosing suitable investment option
a) Don’t be lured into investing, for instance, in an equity-linked product if your time horizon is short, or into buying traditional insurance plans for your retirement since returns are barely 5-6%.
b) To reach your financial goals comfortably, choose an investment option that suits the time available for the correctly calculated goal, and set an individual asset allocation for each goal.
9. Not saved for other goals
a) Do not allocate too much money to a few goals, as you will miss out on other crucial ones, while the idea is not to achieve only the key goals, but to optimise your resources in such a way that they help achieve the maximum number of goals.
b) To avoid missing your goals, prioritise these on the basis of their importance and timeframe, so that if you fall short of funds while allocating resources, you can dump or scale down the least important goals so that they fit into the financial plan.
10. Assumptions are unrealistic
a) Don’t expect all investments to give a repeat performance in all the years, as your returns will depend on how the economy fares, to avoid facing a shortfall in your financial goals
b) The long-term returns assumed in your financial plan must align with it, including the tax impact, when you calculate the returns from an investment.