June 30, 2014

Life and Investing

Beyond the often-cited need for returns or safety of our money, there is a bigger purpose to investing in our lives.  The clarity to see investing in the context of life can help us make better investment decisions.  This post offers a perspective on this for those of us who are working and haven’t yet retired.

Most of us start our working lives with no wealth, dependent on the earnings from our profession.  As we move through life, most of us build wealth through what we save from the earnings from our profession, and invest.  Years later, when we retire from our profession or choose to take things easy, the wealth that we have built by then, will likely be the primary source of our income. 

Even so, some of us will retire out of necessity (brought about by age or an inability to earn income from our profession), while some of us will do so out of choice, on our own terms.  Whether we will, indeed, be able to be live life on our own terms, will depend on the amount of wealth we are able to acquire, relative to our need for passively generating income from it. If asked to choose between retiring out of necessity and retiring on our own terms, each one of us would prefer the latter. Logically, therefore, the acquisition of the wealth to be able to do so, should be an important (if not the most important) purpose for investing.

Equally logically, we need to understand what it would take to accomplish this goal.  No doubt, the quality of the investment choices that we make throughout our life will contribute to the wealth we build.  In addition, I’d like to submit two factors, related to investing, that will also play a crucial role: one, the amount that we save and invest, and the other, the timeliness of our investments (i.e. our ability to not delay investing).

In my experience, far too many of us focus our attention on the quality of investment choices, losing sight of these two factors.  While all three work best together, and not in isolation of each other, I believe there is a case to say that these two factors are individually more important than quality of our investment choices.  I hope to touch upon this in more detail in a future post.  For now, I’d like to offer the following thoughts:

For a number of people, savings are regarded as what is left over from one’s income, after factoring expenses.  In other words, for such people, paying for today’s expenses is more important than planning for future expenses.  I recommend flipping this around.  I believe that the wealth that we need to meet our future aspirations should determine our investment choices and the amount that we save, and not vice versa.  So long as our aspirations are reasonable, and we start investing early in life, it shouldn’t be difficult to find the right balance between our savings and our expenses.  Thrift and regular investing can also reduce the need for riskier investments, so to say.

While deciding our investment choices, we should diversify against the risk of our profession.  This risk is highest for employees having significant holdings of shares of the company they work for, or entrepreneurs keeping most of their wealth as capital in their business.  What if, something were to happen to the company one works for?  What if, something were to happen to one's business?  Limiting one’s exposure to one's business or the shares of the company that one works for, helps protect against this risk.

Looking at investing in the context of life is a key part of what is known as, ‘financial planning.’  Financial planners understand their client’s financial aspirations and then draw up a roadmap to translate these into reality.  Most even handhold the client on the way towards achieving these aspirations.  Chances are that your trusted financial advisor would be adept in the art and arithmetic of financial planning.  If not, you might like to ask around or check out the website of the Financial Planning Standards Board India.  They have the option to search through the list of financial planners registered with them.

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