Three Lies Investors Routinely Tell Themselves
The most dangerous lies are the ones people tell themselves! And it's a fact that investors routinely harbour misconceptions about their investing habits or behaviours, which could work to their detriment in the long run. Here are three common ones to watch out for.
Lie #1: I'm a long-term investor
Long term investing is usually synonymous with risk taking; and it's no surprise that many investors, often buoyed by upbeat markets, assess their risk profiles inaccurately when everything's hunky-dory. Personally, I've witnesses this phenomenon many a time. Despite being cautioned by well-meaning Financial Advisors on the very real risks that accompany the higher return potential afforded by more volatile financial assets, investors fail to introspect properly. Since 31st January, I've personally seen many a 'long-term' investor fall apart in confidence, although the magnitude of the correction in both debt and equity markets has been fairly benign. Before you decide to christen yourself a long-term investor, its best to go beyond paper-based risk profilers and actually visualise your portfolio down 30% to 40%. Would you behave rationally in such a scenario?
Lie #2: I don't need insurance
This common lie is the prerogative of the over-optimistic, or the foolhardy! The fact is - barring just a handful of people who have a massive asset base to cover for their loss of life or the outflows associated with serious medical emergencies, each and every investor requires a well-planned risk coverage strategy - comprising of adequate term insurance coverage and Mediclaim. Your death benefit needs to equal the 'value at risk' of your future goals, plus your outstanding liabilities, plus at least 15 times your net annual income. In terms of health insurance, you need to have a coverage of at least 2.5 to 5 lakhs per family member. Both these steps are absolutely vital for your financial well-being.
Lie #3: I can save 'X' per month, uninterrupted, for my future goals
The process of Financial Planning can be quite magnetizing when it comes to spurring people into action when it comes to saving for their future goals! Post the Financial Planning process, I've seen too many people swinging to the opposite end of the spectrum, and starting monthly SIP's of inordinately high sums.
Thereafter, these savers find it extremely hard to stay committed to their savings plan, and often end up compromising on lifestyle spends to an absurd degree in order to keep their savings plans going. In the long run, this doesn't work out well, as most of these SIP's wind up getting stopped or scaled back. Instead of going all out at the end of the Financial Planning process, it's a lot better to start with a monthly savings plan that is sustainable after buffering your fixed and discretionary monthly spends by a 10% margin. Discuss an annual step up plan with your advisor - you may be amazed at the difference that an annual step up of even Rs. 5000 or 10000 in your monthly savings, could end up making.
