By Amar Pandit
We all have that set of relatives or friends who are self-proclaimed investment gurus. Usually people who have been following the markets and investing for many years, believe that they actually ‘know-it-all’, and generously start imparting their knowledge on ‘how you can double your money’ or ‘how you should stay away from gambling your money in the stock markets and invest only in safe asset classes like gold and real estate.’
Many a times, we get influenced by their views and tend to take their advice, as when it comes to personal money matters we are usually more comfortable to rely on people whom we know and trust. However, it is very important to differentiate between a qualified financial advisor and a person who is giving advise based on his experience as an investor. A person who is not qualified will usually give you advice, based on his personal experience such as; how his investments have performed, which asset class have worked for him, with ‘returns’ being the focus. However, there are so many other factors to be considered before investing, such as time horizon, risk profile, portfolio diversification, liquidity needs, current financial situation, and so on. A lay man will not have the expertise to factor in the above factors and usually make adhoc investments. A qualified financial coach will first understand your needs, assess your risk profile, help you set financial goals, understand your overall financial situation and only then advise you. He will make a detailed investment strategy and advice you to make investments towards achieving your financial goals.
It’s just like getting a trainer at a gym or a dietician, versus taking fitness and diet tips from your friend. Of course the right thing to do is to get a trainer, who would first understand your body type, design a plan and then play a significant role in your journey of achieving your fitness goal. Apart from understanding your unique needs, a good financial advisor will be unbiased, well versed with the market trends, and he will have field expertise backed by extensive research, on the basis of which he will construct a portfolio that is suitable for you.
One of the most common financial mistakes is related to insurance. Saurabh is a 60-year-old dentist, not proficient in finance and mostly keeps himself updated through his patients. One of his patients, who is an insurance agent, convinced him that investing in Unit Linked Insurance Products (ULIP) is the best thing for him. He trusted his patient, who was more like a friend and bought 3 policies from him. However, when Saurabh consulted a financial planner later, he found out that these policies have high lock in periods which is not suitable for his situation, as he is looking to retire soon. They neither provided adequate life cover nor generated greater returns due to the high charges associated with it. Also, the premiums were extremely high.
The financial planner then made Saurabh understand that insurance should be taken with the sole aim of getting adequately covered and term insurance is the right product for him at this stage. He also stated that the concepts of insurance and investment should never be mixed. It is important to understand that one size doesn’t fit all and every person’s situation is different. Your goals are different, so is your risk profile and investment time horizon. Hence, even your investment strategy and portfolio should obviously be unique. While your friend or relative may wish the best for you, listen to their advice with a pinch of salt and ensure you consult your financial advisor before making any investment decisions.
(The author is CFA as well as Founder & Chief Happiness Officer at HappynessFactory.in)