Let me start with some examples of random advice.
You go to the bank and meet with your relationship manager there. After helping you with your basic work, he starts (of course, after checking your bank balance)- Sir, I have a very good investment plan for you. Sometimes you listen and sometimes, you avoid. If relationship manager adds another line – Sir, this plan has given 18% returns last year, you start listening. I will not get into much details of how relationship managers sell all the bad products, but what is relationship manager doing here?
He is giving you a random advice. Why, because he knows nothing about your investments other than your bank balance. (Of Course, he has to complete his targets!)
Let us move to the next one
As markets are booming now, everyone is suggesting you to invest in mutual funds. Invest in large caps, multi caps, midcaps ELSS funds etc. etc. Whenever, you talk to your friends or family, someone have that 1%-2% better return than your own mutual funds. That person will always say, see I told you to invest in this fund.
The person is giving you a random advice. Why, because he thinks that he is better investor than you.
3rd One
If markets are booming now, it will also come down at some point of time. Right! Trust me, all the insurance advisors who are selling traditional insurance policies become super active when there is slight downside movement of 3%-4% in the markets. They will always tell you, see I advised you to invest in safe policies.
Again, a random advice. Why, because the agent wants to earn a huge commission.
Let’s move on to the 4th one
You were not aware about the mutual funds or you have just started investing in mutual funds. People around you always say that insurance policies are bad and you should not invest in them.
But there is a 10-year-old Jeevan Anand Policy which your father had purchased it for you, what to do? You put a query in a social group, comments start pouring in immediately. Half will ask you to surrender and the other half will ask you to continue.
Again, a random advice. Why? No one is asking you any details about the policy (except few ones)
There are endless examples like
- Someone advising to invest in stock markets because he/she is earning well from there.
- Someone advising to invest in derivative because he/she had doubled their money in just one day!
- Some blogger suggesting best mutual funds to invest in 2019(only for 2019?)
- Random advice of buying a home because the property rates increased by 15 times in last 20 years.
You can also help me to add more. I will definitely include them in my article.
But, how it impacts your personal finances?
Let us discuss this in 3 points
- Why do you take Random Advice?
- How it impacts your personal finance?
- What is the solution?
Greed
Who does not want to be rich in their lives? You, me or that matter, anyone in this world. But, can you be rich in 2–3 years? (Yes, Exceptions are always there). Barring exception, it takes a lot of hard and smart work to get at the top. Even Warren Buffet took 90 years to reach where he is right now. But we want to beat him in 90 days! The greed part in you starts here.
- That 1%-2% extra returns in mid caps /small caps helps your greed to take random advice.
- The extra insurance cover which is shown in ULIP policies helps your greed to take random advice.
- The suicidal attempt to get into derivatives to make your money double in 2 days helps your greed to take random advice.
- Investing in Non-Convertible Debentures of risky companies for 1%-2% extra returns help your greed to leave the safe investments like FDs
- Some pamphlets showing returns of 5% per annum helps your greed to think about the investment options.
- Some random advice of stocks giving much better returns helps your greed to buy some though you do not know the ABC of Equity Investments.
Fear
I am a member of a Whats app group of my society. One day, there was some random discussion about investments. One of the guys had invested some lump sum amount in 2008 when the markets were at its peak as per the suggestions of his friend. The market crashed and his investment got reduced to 50%. As soon as the markets recovered next year, he withdrew his principal amount fearing the market will crash again. He now only invests in real estate and debt instruments!
All the traditional insurance policies are sold only because you are scared. You do not want to lose your money. Any insurance agent comes, explains you that market can crash anytime and you start working on random advice.
Ignorance
Sometimes, ignorance is bliss, but not in your financial life. If being ignorant is a crime, staying ignorant is a bigger crime.
How many of you have asked this question to a friend or a family or in a social media group?
- What are the best mutual funds to invest in 2019?
- What are the best investment options in 2019?
- Which is the best plan for child education and marriage?
- Which is the best plan for retirement?
You are asking all the above questions because either you are ignorant or you are staying ignorant. You know, what are you ignorant or staying ignorant about – Your Own Personal Financial Goals.
How it impacts your personal finance?
If you are ignorant about your own personal financial goals, the chances are you will keep taking random advice.
- You will keep running behind the additional returns of 1%-2% and in that pursuit, you will lose your money somewhere.
- You will either have a concentrated equity portfolio or debt portfolio
- Or You may have only real estate in your portfolio
- You will have 20-25 number of mutual funds, out of which 80% will have the overlapping portfolio.
- People will keep selling you insurance policies and you will keep asking – whether to surrender and continue.
- You will have an insurance cover of just 10 Lakhs that too from a Jeevan XXXX Policy.
Is there a solution to It?
Definitely, there is a solution to it and it is very simple
- Define your personal financial goals
- Buy the time, if someone sells you the product, not the product. Check if the product is aligned to your goals. If yes, research about it, the same way, you do before buying a mobile phone.
Also Read : Asset Allocation by Corpus Requirement
Personal Financial Goals
You want to buy a car- Define -Which Car and After how many years, let it be an Audi but you know your goal.
Child Marriage- Define- After how many years – Amount Required in Current Cost – Let it be 1 Crore but you know your goal
Retirement Planning – Early Retirement or Retirement at 60/ Retirement expenses in Today`s cost – Let it be 2 Lakhs per month but define it.
Once you start defining your goals, you will start investing. You will start investing in right instruments. Because each instrument has different role to play in your portfolio. Select based on your goals and not as per random advice.
If your goals are just 1 year away, you will invest in RD or FD. Your goals are 15 years away, you will start investing in equity mutual funds.
Till then avoid random advice from the bank relationship manager and the insurance agent.
Let me know your views, till then
Keep Investing!
Informative as usual