I have been away on a vacation to the Rann Utsav in Kutch for the last few days. It was a great experience and I would definitely recommend it for the readers who have not been to it so far. As I had some time to myself I reflected on several aspects of my life and that included the blog. Of late, I have been thinking a lot on the way traditional financial planning is done and feel that a different take on it may be more beneficial to investors.
The normal or regular way of goal based financial planning is quite well known to all the readers of this blog. It is also documented through several posts here and elsewhere. I am therefore not repeating the process here, read up the posts under this category, if you want to know more about it. Now, while goal based planning is all right, in order to understand the future amount that will be needed for an inflation linked goal, the issue I have is when we link our investments to it.
Why do I see goal based investing as a problem? Here are some reasons:-
- The assumption of returns is flawed and can make your financial plan go completely haywire. You may think investing 10000 per month with XIRR of 12% over 15 years is going to get you somewhere. An event like 2008 0r even the last 2 months can completely get it skewed.
- At times the inflation assumptions are meaningless. For example IIT or NIT fees can go through a sea change in the next 2 years. IIM fees have gone through the roof in the last 4 years or so. If any investor had planned for these with an education inflation of 10% or so, he will clearly have inadequate money for these goals today.
What can you then do to take care of it? Well, my suggestion will be to implement the 3 portfolio strategy rigorously. I am again not explaining it in detail here, as it is quite well documented in many of my earlier blog posts. In terms of concrete strategies, here is what you can look to follow:-
- Largely stick to your PF and PPF for debt investments. If you have a daughter, definitely look at having an SSY account for her.
- Have a MF portfolio as suggested in my blog. Invest regularly in it through appropriate tracking of relevant indices, do not go for a monthly SIP. In general the MF portfolio should be able to meet most of your financial goals except for retirement, where the debt will form an important part.
- Any surplus after the above 2 must go to direct stocks. This is to be used mostly in cases where long term care etc becomes necessary at ages of 80 plus.
More importantly, live your life as you want to in between the years 30 and 50. You will have enough money to invest and the invested money will grow. There is really no need to get obsessed about it. Your needs and responsibilities will come down a lot in the later part of your life and your investment capacity will multiply several times when your children have finished their studies and are on their own.
Bottom line – forget goal based investing and invest as much as you can. Equity investing is less about the amount of money put in and more about when you put it in. As the years go by you will also be able to put in more money. So stop playing with calculators and checking your portfolio values everyday, there is more to life than this anyway.