“Well intention-ed” advice which you should avoid

Over the last year I have interacted with several people in the area of personal finance – some have wanted advice, others just a confirmation they were doing the right things and yet others who wanted to tell me why I am so wrong in what I say. I have also come in touch with more financial advisers in this period, both formal ones who take it as a profession and informal ones who run a blog or a Facebook group disseminating knowledge in the area. I suppose, in a way I am one now too.

I have come across a lot of well intention-ed advise which, if followed seriously, will be injurious to financial health or at least mean that you will have sub-optimal returns. Though I have written about most of these, I thought it will be a good idea to point out a few in this post. These are clearly from people who mean well, but also ones you should really avoid.

  • Term plan is the only plan that you should consider for insurance. Yes taking a term plan is a good idea but there are several other insurance products that you can explore. Some of these are quite well suited for specific situations.
  • ULIP is a bad product which you should never look at. It is true that the earlier versions of ULIP products were having very high charges and were not suitable for investments. However, a lot of it has changed with the new guidelines and performance of some ULIP’s match those of better MF’s. Examine this yourself before deciding whether to invest.
  • Home loan can be taken because it gives us tax breaks. There are many good reasons to buy a home but tax breaks are not really one of these. Read a couple of posts I have written in the blog to understand it better.
  • One can never predict the market levels so it is pointless to try. I agree that short term predictions on the market are difficult if not impossible. However, there is enough evidence to show that experts do get the medium and long term trends correct, more often than not. You do not have to try this yourself, just identify good analysts and  follow them.
  • Investing in stocks will require you to understand balance sheets and a whole lot of other stuff. Well, if you have the time and knowledge to do this, try it out by all means. It is however, not necessary to re-invent the wheel. There are far better people than you and me who are doing this for  a living and we just need to identify someone reliable whose analysis we can trust.
  • Risk or volatility in stocks is much more than in MF so avoid stocks. This is clearly wrong as both of these invest in the same underlying asset class and are therefore exposed to the same risks.
  • One good Balanced fund is adequate to take care of all your investment needs. I would not even have a Balanced fund in my portfolio, let alone it being the only fund. One fund of any category is a bad idea as it gives you limited coverage of the market, thereby increasing your risks. Read my posts on Balanced funds as well as MF portfolio selection in my blog to get a better understanding of this.
  • Mid cap and small cap funds have high volatility so you should avoid these. Volatility is a function of the market dynamics at a point in time, so this statement is not universally true. Even if it is true at times, you need to understand these funds also give you the maximum growth in your portfolio.
  • SIP in MF is the only way to invest, do not look at anything else. While there are merits in SIP mode of investment, there are quite a few limitations too. You can read my posts on SIP in the blog. It will be ideal to supplement SIP investments by some well directed one time investments.
  • MF selection is a complex process, use MF calculators and all kinds of ratios. Again, you need to trust people who are doing this as a profession not amateur enthusiasts. Once you have decided on your portfolio structure, go ahead and pick a top rated fund of each category. Use websites like VR online etc for this purpose.
  • You need to stick to an MF for 3 years or more, even if it is not performing. Loyalty is a great thing in life but do not waste it on MF. Review annually and weed out the laggards every year, if you are not sure see for another year.
  • Your expenses in retirement are a function of what your expenses are today. What you will spend in retirement depends on how you want to live in retirement. Read my posts on this to have a better grasp on this.
  • A frugal lifestyle will help you invest more for your retired life. I have never been a fan of frugal lifestyle, though I dislike ostentatious expenditure. It is only when you have spending needs, you will feel the need to become more ambitious with your earning.
  • Fix your investments every month before your spending. Yes, you do need to invest every month but not as has been suggested. Lead the life you need to today, future is important but not at the cost of depriving you and your family today. 20 years down the line you may have a lot of money but limited ways to enjoy the same.
  • Have a separate portfolio for each of your goals. Completely senseless approach, you can read the post I have written on this.
  • Shift money from equity to debt 3 years before your goal is reached. Again, this is a sub-optimal and unnecessary way of doing things. Follow the 3 portfolio structure that I have suggested in my posts.

There are many more but I think this post has already got long enough !! 

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

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4 thoughts on ““Well intention-ed” advice which you should avoid

  1. Rajasekhar Roy sir, I am reading your articles . It gives me understanding of investment in 3 portfolios.
    Regarding insurance, I have Lic 21 lac , out of which 2 lac money back started in 2004&2006 for 20y, 4lac in 2008 for 30y & 15 lac pension plan in 2012 for 30y. Is it worth to continue these policies? I have started investing in equity&MF(sip) for the past 4 months& following capital marcket. Thanks for knowledge sharing. Suggest me. I will have some other queries and will ask soon.

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  2. Dear Rajshekhar sir,

    It has been a wonderful experience reading articles that you post on this blog and at 27, this has come at an opportune time for me personally, since I’ve recently completed my PhD, got married, and have started earning recently. I feel motivated after reading most of your posts and now I’m pretty much determined to embark upon investing for my subsequent life stages, as you have described quite aptly in your blog.

    Concerning this particular blog post sir, since you have emphasized upon your philosophy of ‘not reinventing the wheel’ (an approach which I too believe in and follow at times) and keeping a track of few analysts whom you may like when it comes investing in stocks – This has got me pretty interested in knowing about the analysts you follow, sir. This is of course subject to you following such practice as you suggested. If you do follow some analysts when it comes to investing in stocks, could you please share that with us? I believe this would be very useful to begin with (for many of us). Given your particular style of experience sharing (something which I greatly like about this blog), I could see that a post on analysts that you follow along with the rationale behind following those or a description of your particular experiences that may have led you to put faith into what those analysts say, would turn out to be a great read and a good starting point for many of us, sir.

    Please do consider writing about it if possible.

    Here’s hoping you continue to keep writing and inspire many for years to come.

    Regards,
    Poojan

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  3. Can you pl give some examples of good /improved format of insurance and ulip in current conditions for 25 yrs person. This will make me understand better your post .Thanks.

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