PowerMF Blog – Empower Yourself

Like any building, which requires 4 pillars to stand on, personal wealth creation also requires 4 strong pillars. All financially successful people have gotten their success thanks to their understanding of these 4 pillars. They are

1.    Nothing happens without a Plan

2.    Knowledge your only weapon

3.    Risks & Return Trade Off

4.    Importance of Liquidity

Nothing happens without a Plan

Planning is the most important part of any activity. Wealth Creation and Investments are no different. The areas which need to be planned include:

a.    Income, Expenditure and Savings

b.    Investments

c.     Tax

d.    Insurance

e.    Retirement

f.      Goal Setting

The most important part of the Plan is to define your Goals in an un-ambiguous manner. There are various Financial Planners available who provide a comprehensive plan. However, it is your responsibility to articulate your goals in life and more importantly for implementation of these plans. Hence, a clear commitment to these plans as well as the Goals is a pre requisite for success in your journey towards financial independence and wealth creation.

Knowledge your only weapon

The only weapon we have in our endeavor to create Wealth is our Knowledge. While we do not need to be an expert, we should have basic understanding of various products and markets. Believe me, it is not a rocket science. It only requires us to spend a little time. May be around 5-6 hours upfront for understanding the basics of finance and not more than an hour every week to update  yourselves with the requisite understanding. An hour for managing the money is probably a very small portion compared to over 40 hours of work per week we do in order to earn the money. With technology and information reaching far and wide and easily accessible getting quality information is not difficult for one who seeks for it.

Believe me, it is not difficult.  A person with basic IQ levels can understand the markets and products to the required extent. Even when you take advise from professionals, in order to ensure that you are taking the right decision, and in order to provide right inputs to them, you need to know the basics.

Risk Return Trade Off

When it comes to investment, there is nothing called a Free Lunch. For every effort to make money in terms of returns, it is necessary that certain risks are taken. Higher the returns sought, higher is the risk that is required to be taken. In every situation, we need to clearly understand what are the risks involved and should not get carried away by the projected or promised returns in any investment option. If you find something to be too good to be true, then it probably is.

There are two emotions which typically drive our investment decisions viz. greed and fear. Greed makes us run behind the returns and sometimes blind us with respect to the risks associated with it. Similarly, when Fear takes over, we do not see the opportunities that the market presents. Most of us do not take right decisions with regard to investments owing to the fact that emotions take over wisdom. The moment one overcomes these emotions, he can take informed decisions understanding the risk return trade off, which is bound to be far more close to being the best decision. Hence, clear focus has to be kept on the risk – return trade off when we take any investment decision.

One more area of focus for effective wealth and investment management is to know what the risks are. There is a normal tendency to generalize risks associated with any decision. However, it is important to note that we cannot generalize risks and risks are not comparable. Further, depending on the markets the risk changes with time. For eg. The relative risk of equity markets is found to be lower over longer periods of time than over short periods of time. It is important to know these things when deciding on the investments, which will enable us to use the right product for the right  purpose.

In addition to investment risks, there are general risks one is exposed to. Insuring self, health and property are very important in order to ensure that our hard earned money which have been saved and put aside for long term goals are not withdrawn for the purpose of catering to exigencies.

Importance of Liquidity

While Risk and Returns are important, one factor that needs to always be kept in mind is liquidity. There is a need to have enough liquidity in order to cater to unplanned expenditures and requirements. While Returns and Risk are important and so is the need to make the hard earned money work harder, it is equally important to keep enough liquidity. It is generally advised that 6 to 9 months expenses are always available in the liquid form so that in case of exigency, you can fall upon this and ensure that your long term objectives are not compromised owing to such situations.

Also, when taking any decision on any specific investment one are which needs to be given focus in addition to risk and return is the liquidity of such investment and the cost of such liquidity where applicable (like pre mature withdrawal costs, exit loads etc.). Depending on the purpose for which the investment is being made, you can decide on the liquidity parameter.

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