As distressing as the past year has been, most balance sheets have survived more or less intact. But even if your finances are still healthy, take note, amidst the ups and downs and twists and turns of the economy and stock and bond markets – plus all the other forces that buffeted your finances – there are lessons that could help us make better decisions the next time calamity strikes.
Building wealth helps us reach our goals as well as setbacks. Stock markets corrections and bear markets , recessions, health emergencies, job loss etc are here to stay. An honest assessment of whether we should allow emotional, psychological or other behavioural miscues to nudge us to make money or regret such as exiting the stock market low and missing the rebound. We are not wired to easily make rational decisions when our fear is through the roof. Mistakes are learning opportunities that put us on track to accumulate even more wealth.
Here are 7 tips that will help you building & keeping the wealth :
STICK WITH EQUITIES Equities is a volatile asset. What if we make volatility our friend. We can’t control market moves , but we can control ours. The NIFTY 50 over the past 25 years has given a CAGR return of 11%, however, high quality business’s have yielded far higher. Its always a good idea to find such underlying business’s and stay with them. Here is an example of one of the oldest funds with a 25 year track record , a systematic investment in one of the oldest Flexi Cap fund of just Rs10000 has yielded in a corpus of Rs8.74Cr with a annualised return of 20.58%. Let’s accept we all Rs10000 a month for investing, its just that we weren’t disciplined about it. So investing for the long term helps.
SPREAD THE WEALTH AROUND Another lesson for investors from the pandemic . the Ukraine War, is that Mr.Market is unpredictable. And that highlights the importance of having a diversified portfolio. Diversification won’t protect you from losses but it will smooth out your ride in the long run. Start with an asset allocation plan , decide first up how much you want to hold in stocks, bonds, global funds, real estate , gold etc. A portfolio for a moderate risk investor with a 10 year horizon can fold 40% in bonds, 50% in equities, 10% in cash.
PUT MORE MONEY INTO SAVINGS As a child we had a piggy bank. Consider your savings account as one. Every month the idea is to save first and spend later. This I think is the most powerful idea. Compulsorily on receipt of any compensation at the start of the month, watch all the expenses prudently. The endeavour is to postpone unnecessary expenses. The money saved is reinvested in equities while we start with the month new & repeat the cycle again. I have done this all my life.
TAKE CONTROL OF YOUR DEBT We generally avoid debt. Having a credit card debt is the worst debt to have. One way to reduce the credit card debt is to find and transfer the balance to a lower rate card. As a thumb rule I prefer all the other EMI on mortgages should not exceed 30% of your post tax income. Form a contingency plan at least have 12 months of your month expenses in a liquid fund. There is often a temptation that if the markets are doing well then let me not pay off my loan and enjoy the market ride, this I believe is an event awaiting a disaster, in the last 13 years we have had two occasions where the markets have crashed 50%. It needs to go up 100% for your to get to the starting point. I don’t want you to be in that situation, so all lump sum gains like bonuses, incentives etc should be used to pay off the loans. The earlier you get debt free the earlier you get to invest with a relaxed mind.
RECHECK YOUR INSURANCE Insurance doesn’t help you build wealth but it helps you protect assets. Without an adequate coverage any emergency will decimate your savings. A general thus rule, A life insurance cover of 5X your nett income , a health insurance of 10X your nett income & a critical illness rider of Rs50lakhs is the least you can do for your self & your family. (Please contact your insurance advisor for a plan specific to you). Also just stick to a term plan and do not fall for any traditional insurance, money back etc plans. Most likely the guys who sell you these insurance plans won’t buy them.
STICK WITH YOUR ADVISOR Consulting a pro (like me “:-)) to help you make important financial decisions either on an ongoing basis or when major decisions loom – can help you avoid mistakes that could cost you down the line. The key point here is the advisor needs to have your interest as first then everything else.
PROTECT YOUR LEGACY The pandemic nudged a lot of people to take action on an estate plan. Most of us leave without a will or a estate plan. Having an estate plan is important for everyone and it’s crucial as you approach retirement. You tend to have more assets at this stage of your life and you’ll want to be certain that your spouse and your children will be well taken care if anything happens to you.Without a will state law will dictate distribution of your assets. Succession requires probate if a will is existing which is time consuming. You can avoid a probate by setting up a trust, the most common of which is a revocable living trust. This is helpful incase you have a specially challenged legal heir. An estate lawyer specialising in all this will be of immense use .