Of late I have been interacting with a lot of readers, who are mostly happy to learn new things and find the blog very useful. There are a few however, who have not understood my investment framework at all and therefore ask me questions that I have answered multiple times. Yet others keep telling me that it is “personal” finance therefore no rules will apply.
The first misconception to be cleared is that framework and rules apply to any situation in life, be it your profession, a social situation or personal finance. Implementation of the framework or rule is a different matter altogether and that depends on the individual context. For example, if you are driving a car you will have to obey the traffic rules, you just cannot say that you want to be creative there. However, within those rules you can show your own skills of driving to cover a distance in a shorter time than normal. The framework of personal finance in terms of insurance, investment, goals etc is a similar one. All of us need insurance, how much and what type of insurance is an implementation issue.
I always follow a simple 1-2-3 framework for all my investments and strongly advise all others, who may want to listen to me, to do the same. This is simple and effective, moreover it cuts all the clutter and noise of useless activities. Once you start doing this you will immediately see the simplicity of it and also it’s elegance. Though I have explained it in other posts let me give a synopsis here for the benefit of new readers and for reinforcing the concept for older ones.
- 1 Goal timeline for all your goals, short term and long term. Think of it as a long road with the goals as milestones, each having a value associated with it. When you reach a particular time you should be able to fund the goal in question.
- 2 Asset classes to invest in Debt and Equity for all your goals. Real Estate or Gold is only for consumption.
- 3 Portfolios for all your investments – Debt, Mutual Funds and Stocks.
How you implement this framework is up to you. Some people will invest more in debt, others in equity. An investor may want to be mainly in stocks, another may only want to do SIP in Mutual funds. Within stocks and MF universe there will be many options that you can choose from.
Follow this framework while giving good thought to the implementation needed for yourself. It will make your investment life simpler and allow you to concentrate on the more important things. Even within stocks and MF you can use a framework for investments. We have already discussed the portfolio structure for Mutual funds.
Will be interested to see a lot of comments on this post.
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