To create wealth in the long-term, you need to first set your financial priorities. While many may take inspiration from legendary stock market investors such as Warren Buffet and Rakesh Jhunjhunwala on focusing on stocks that will be multibagger, one right pick here and another there won’t take you anywhere. There is nothing wrong in finding the next multibagger but before investing you should ensure that your personal finances are in order. It is incorrect to compare portfolio performance with index performance. Comparing your portfolio with index ignores two major issues.
Risk in investing
One is the risk. In bullish market, it is easier to outperform the index. Just load on high beta stocks and surely you will outperform. Such an approach will make the person take more risk for higher returns. The second issue is to understand what the investor really needs—income or growth from stock markets? Ideally, it should be a combination of the two for higher long-term returns. If you want to know how your portfolio is doing, compare it with your actual needs rather than some arbitrary index like Sensex, Nifty, or any sectoral indices.
Priorities in investing
Most people are concerned about how their investment is faring but are clueless about their financial goals. The first priority in attaining financial goals is to find out if you are underinsured or if you have enough health cover for yourself and your family to take care of any medical emergency. You should also ensure that is is enough liquidity to meet any financial emergency. You should also ensure that your financial investments are well diversified.
In fact, those who don’t appreciate the importance of personal finance are unlikely to save or invest a lot of money. They will instead end up spending whatever they can. On the other hand, there are those kinds of people who are misers but still don’t understand the real meaning of personal finance. They will end up with a lot of bank fixed deposits, investments in small savings and money stashed in bank accounts. However, the problem in such type of investments is that the money is not getting utilised to its fullest extent and fetch very low returns. In fact, the country’s largest lender State Bank of India has cut interest rate on savings bank account by 50 basis points to 3.5% from 4% on balance of `1 crore and below after over six years of status quo.
So, understanding personal finance is absolutely necessary. In a nutshell, we can highlight the points in order. First and foremost, get your and your family’s health insured. Second, (save some money) leave some money under the mattress for emergencies. Third, keep aside money to pay for your debt/home loan or any EMI. Fourth, invest for long-term goals (we mean investing for the long term and not looking for short-term gains or speculating). Fifth, spend less than what you earn (credit card can be blamed partly for overspending). It is pretty simple. Be ready to ask yourself some tough questions. Do I want to retire early? Have I planned my finances well?
Creating long-term wealth is not about striking gold in stock market but managing your finances well. So, take out some time to assess your risk coverage, goal readiness and investment plan. Strike a balance between saving and spending. I always stand by the quote: “Save enough money so that you’ll have enough for the future and for emergencies, but spend enough now to avoid looking back with regret”. One should not compromise the present by not spending at all. Remember, anything excessive is dangerous and you also shouldn’t compromise the future by not saving at all.
The writer is director & COO, Tradebulls Securities