Want to do well financially in 2016? Tensing Rodriguez tells you how…
A new year is upon us; and, as is our habit, we have made some weighty resolutions – some to keep, some to let go by the time the year ends. No problem. Not every resolution has to be to be taken very seriously. But even then it helps to make the resolutions. For it forces us to step back and review, where we have missed our goals in the previous year. At least some of those slips can be made good. As for the rest, another new year will dawn; we will still have another chance to come closer to our goal.
What is true of the rest of our life, is true of our investment habits as well. What shall we resolve for investment this year ? No. Don’t look at the stock market; that is the last thing that should enter into our new year resolutions. We cannot obviously resolve to keep the market high; nor can we resolve otherwise. Resolutions have to be about us. So the question we ask ourselves has to be : What do we need to set right about our investments this year ?
Correct : the first thing that we need to do is review our existing investments. So the resolution #1 will be : I shall begin this year by taking stock of my existing investments. Then #2 will be : I shall work out my investment requirements. Let us first deal with these two before we move ahead. Why am I so particular about this review ? Because during the year gone by, it is very likely that our investments have just happened; not exactly to the beat of any rhyme or rythm. We had some money to invest, we invested it. We came across what looked like a brilliant investment opportunity, we grabbed it. Someone gave us some good advice and we followed it. And so on. No problem; that happens. But then, at the end of the year, or the beginning of the next year, we can take stock of all that and realign our investments to best fit our goals. Can we avoid being erratic about our investments during theyear ? Definitely we can. But we can deal with it later; for that will be our resolution #3. Let us first deal with resolution #1 and resolution #2.
In a two column sheet let us put down what is available and what is required. For both we will have to set our time horizon. Let us suppose I am 35 years old. I plan to work and earn till age 55. During this period I have some major obligations to meet (the minor ones being the monthly expenditure, the housing loan repayment, etc.); the principal one of these is the higher education of my children. I work out the requirements – the amount required and the time point when it may be required. Based on these I calculate the corpus I need to create; and then work out the investment plan I need to follow. There is another corpus that I need to create : a source of income for my old age (or, better still, for OUR old age; you know what I mean !) So I work it out the same way. That gives me the Total Investment that I need to make this year. Then I calculate what I already have : what my erratic invetsments have accumulated till now. Then I adjust my Total Investment required to take that into account. That gives me what I actually need to save and invest this year.
That is all about the first two resolutions; those are a one time affair; so relatively easy to keep. Then comes the third, the real resolution that will have to be seriously adhered to day after day – that is pretty difficult. The third New Year Resolution for 2016 requires us to invest in keeping with the investment plan that has emerged out of the resolutions #1 and #2. So merely having some money to spare cannot be a reason to invest. Also the converse of it : not having some money to spare cannot be a reason not to invest. In other words, we have to plan to spend and save in such a manner that we can invest what we have planned to invest.
An investment plan requires us to decide not only about the quantum of investment, but also about the asset into which we are going to invest. And that means assessing each asset for its return potential and risk profile. Well, it is a single decision almost; for return and risk are directly related; so when we choose the return, we loose the choice about the risk. What we do is choose a return, and then ask ourselves if the resulting risk is acceptable to us. If not we trim our target return to bring the risk to tolerable levels.
But probably the most difficult part about this resolution is the steadfastness : we need to become immune to the market storms. Or in other words, to resist the temptations that arise out of greed and fear. Let the value of our asset swing up or down, wemay look like fools battling the tide or missing it, we need to keep steadfast to our investment plan – the same quantum, the same allocation.
Yes, that sort of steadfastness may look stupid. It certainly is, if our goal is gathering the maximum wealth in our lifetime, and then leaving it all for the hungry crows when we are gone. But it is definitely sensible if our goal is having enough when we are alive and enjoying what we have. Yes, the key words are ‘enough’ and ‘enjoy’. That is what these 3 New Year Resolutions are all about.