Wednesday, 4 October 2017

Why a Financial Plan?

Couple of days back, I saw one of my clients trying to desperately reach me on my hand phone. I was in series of meeting and could get back to her only at the end of the day. I saw 7 missed calls. When I called the client to understand the desperation, she was furious and tensed and gobbled up half the words and said finally that she wants to withdraw some amount from the investments. As I could recollect my discussion with her while investing, I reasoned out that the investment was supposed to be a long term investment and the funds we chose to invest are equity schemes which might swing both ways wildly and we might see a negative return as well. I tried to sensitise her that the withdrawal will attract exit charges as we just started to invest. I finally had to yield and let her withdraw at a minor loss, of course. Added to that the market corrected and the prices of schemes were looking down. The downtrend triggered panic and she felt that the actual need of using these funds was for an overseas holiday and that might get affected. She was answerable to her husband.Oh my! the funds were needed for a holiday and we invested in equity funds? More probing gave me more stunning facts that the client had a chat with her friend who seem to be making good money in the stocks and the client too wanted to make a quick buck by investing into equities. She, by the way, invested some amount into commodities and was not expecting to get back the principle.

As a manager of wealth, I always insisted that my clients looked at their needs and wants and put a financial number to it and gun for that number. Any requirement below one year will blindly stay in liquid funds. 

I could never get over the two apt words widely used by all fund managers. Greed and Fear. Greed when the markets are looking good and fear when the markets are in the downturn. Basic human emotions have to be won over through a disciplined approach. 

Well, in Financial Planning I prefer to use the words Fear and Need(want, goal,desire).
Fear of not able to have enough finances when the need knocks the door.
Need to achieve goals like housing, car, child's education, marriage, holiday etc.

The bottom line of Financial Planning is to be free of fear of approaching goals. That's how all the investment and insurance companies advertise using the word "freedom".

To overcome the fear, we first need to have defined the goals. Investing without goals is like throwing a dart in the dark and expecting it to hit the bulls eye. Defining goals not only gives oneself clarity but also the advisors to meticulously plan for that goal and choose appropriate products. Plan acts as compass in the sea and constantly guiding you in the predefined path. Else you will end up consuming products which may or may not suit your needs and give you much needed freedom. Investing in financial products does not necessarily ensure financial freedom. 

Some of the investors would have the freedom already but may not realise it and some don't have the freedom but they think they are adequately wealthy. These situations are equally bad and need to be addressed upfront with an appropriate financial number attached to a goal.

Now, what are these goals? Goals are cash bag consuming needs supposed to be occurring over a period of time in future. When we say cash bag consuming needs, we mean them with a financial number. This financial number has to be arrived logically and technically by considering the inflation and expected return. 

Expected return? How do I expect a return? How can I predict the return? If I expect a return, will I be able to achieve it to the last decimal? 

Expected return is again a technical and logical number which will consider all the eventualities and guide you to the financial goal with near certainty.

If you don't consider inflation and expected return numbers carefully, you will run the danger of over estimating or under estimating the cash bag requirement which will not serve the purpose.

So, when we are working towards the goals, when are we building wealth was one constant question I face from the clients. My take is, approaching the goals with confidence that they can be addressed through your investment approach is in itself a wealth building exercise. There is no other way to build wealth than this way for a periodic earner!!! Investments are only tools and are part of the plan. Returns are by product of the plan which result due to investment approach. The earlier you start understanding the essence and appreciate the process the quicker you build wealth. The younger you are when you start your plan the wealthier you will be. 

A financial plan thus clears the hazy future and enables you drive without anxiety and provide you much needed freedom. With the plan on your hand, it acts as a tool say like GPS guiding you to the goal. The financial plan is must for all those planning to start investing. 

I will discuss how to make a financial plan and what questions to be asked to oneself while preparing the plan in the next note.