Business Economy

How not to control your money

When I was a kid, my dad made me memorise the adapted version of the Serenity Prayer: ‘God, grant me the serenity to accept the things I cannot change, courage to change the things I can and the wisdom to know the difference.’ I memorised it but re-adapted it in various forms, for various situations.

While dealing with investors, there would always be some who insisted that I control or predict things over which I had no influence or power. Conversely, they would not focus on things that they could and should have actually controlled, in terms of their behaviour and habits. My simple prayer then would be — please let them focus only on what they can control, let go of what they cannot and may their wisdom guide them to know the difference.

Let me discuss a few areas with respect to money that many of you tend to focus upon, although you have little control over it.

Focussing on returns

How many of you have bought land, property, investment-linked policies or gold asking how much returns it will give in 5 years? Close to none, I am sure. But, how many of you have bought mutual funds or stocks asking how much returns it will give in 3 or 5 years? Really, why such contradiction in behaviour? Fixed deposits (FDs) can give you predictability because they are fixed return products. Land, gold or equity markets are subject to market vagaries. The irony is that what impacts equities (underlying fundamentals) over the long term is reasonably known (which is why long-term return expectation is not totally off mark) while it is little known with land and gold.

By focussing on returns, you do two things: one, you build goals that may go haywire. Two, if your return expectations do not transpire, you go on a full risk aversion mode, going back to FDs alone.

Should you not focus on returns? You can, but only the long-term averages. This is needed only for the purpose of giving direction to your savings and to know if you are on the path to reaching your goal. If returns from assets go down, the simple, logical thing is to increase your savings or, alongside, revisit your lifestyle costs.

This, once you know you are with the right products. You can’t have an endowment policy and suddenly realise that the returns are terrible. This is where mixing the right products based on your goal becomes vital. If you had a short-term goal, then you need a fixed-income product, not a market-linked product; to provide return predictability.

A friend was sceptical that the markets would improve post elections. But when the Sensex returned 12% in 5 months beginning 2019, she was cursing herself that she stayed out. But, from the June peak, when the Sensex dropped 8.5%, she was elated. I asked her if she was going to invest now. She said, “No, it’s too risky.” All analysts are now predicting a further slowdown. Likely, she will neither invest nor build wealth.

Now, two things happen when you predict markets: one, you lose out on investing early, compounding, and averaging. Two, you make terrible moves driven by the emotions of the market. My friend had two chances. One, start investing at the beginning of the year, continue and simply rebalance her asset allocation, when her equity swells, to some debt.

Or she could have invested at least when she saw the market falling. None of these require market predictions. They just need control over your investing behaviour.

The accompanying graphic will tell you the issues on which most of you tend to focus (markets, returns, taxes), where you have little control and ignore what you have control over.

How not to control your money


Controlling your taxes

Yes, you can control your taxes by deploying them right. But, it is more important to invest well to make sure you build healthy coffers. Buying a policy at the nth hour for tax-saving may result in being saddled with a product that may be entirely unsuitable for you. Buying a house merely to save taxes is another classic example.

How much of the EMI is tax deductible? Are you stripping yourself of your ability to save for the next 5-10 years with a high EMI value? What if you had deployed this in other financial savings with lower tax deduction but with superior returns? Should you lock your capital gains into 54EC bonds with low rate of interest just to save on capital gains tax? These are the questions that you will miss when your focus is merely on tax.

Just remember the serenity prayer every time these investment biases crop up.

(The author is a personal finance expert)


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