These are general principles and guidelines which though true are not tailored for an individual’s requirement. They are rather a one size fits all approach. Even the search results on the internet, show up articles, self-help and DIY solutions which can take one only so far and not beyond.
Thus, the best way to deal with this is to appoint a trusted advisor who can understand the pain points better and recommend solutions accordingly. The critical changes that need to be implemented on a regular basis as one’s life situation evolves can also be taken care of by that trusted advisor.
That said, the first crucial step is to actually cultivate strong financial habits.
The strong contribution of the behavioural aspect of investing is often ignored, however, over the long term, it can be the edge that can enable someone to even compete with seasoned professionals. This is intuitively hard for people to understand, but is based on the magic of compounding. A small gain compounded over a really long period of time can become a bigger pile compared to a big gain which is sustained only for a short period of time.
As one can guess, staying the course over a really long period of time is a matter of right mentality and hand-holding by an advisor in difficult times rather than any technical aspect.
The next logical step in this journey is to actually select the instruments for investment.
The idea is to build a customized plan with equal focus on both expected returns as well as risk tolerance. Broadly, there are seven major asset classes that can help one to decide their asset allocation strategy and optimally diversify the investment portfolio. These are Equity, Debt, Gold, Commodities, Currency, Real Estate and Alternates.
Although some experts may not consider currency to be a standalone asset class, for Indian investors, investing in global funds with dollar-denominated underlying assets, makes a lot of sense. In addition, there may be new and emerging asset classes and investors can keep an open mind about them and decide their suitability as well.
For e.g. cryptocurrencies are a recent example of an alternate asset class. They also include assets like paintings, wine or other similar assets that may not have long years of data or transparency. While it may be tempting to invest in any one asset class which is trending and outperforming, over a full market cycle, diversifying is the easiest and most consistent way to achieve investment objectives.
The last thing to sort out is the priority that one should give to each investing activity. The sequence of household budgeting, protection, saving & investment, tax planning, wealth transfer is an important sequence to keep in mind. It is linear and one should not go to the next step without fulfilling the previous one.
Investors who are starting out on their financial, wealth creation journey often get this order wrong, and their focus tends to be on products and perhaps strategies that promise to maximize returns in the short term.
Even though the short-term strategy may play out as per their expectations, it eventually does not do much in terms of overall wealth creation for most of us. This is where the process-oriented approach gains an upper hand if one has to consistently build wealth over many decades.
The author is the CEO, of PGIM India Mutual Fund. Views expressed are personal.
