STOP following these personal finance rules!
The other day, someone asked me “I’m 30 years old, so how much money should I invest in equities? I’ve heard of the 100-age rule, where the percentage of your investment in equity should be 100 minus your age. So in my case that should be about 70%, right?”
You see, this guy is the sole breadwinner in his family, and has a 2-year old kid, with another one on the way.
Now, in the next 5 years, he’s going to need a shitload of money for his children’s education. How can he invest 70% of his money in equity? What if the market is volatile and his equity portfolio is in the red? Where will he go for the money?
That’s the problem with following common rules and best practices.
A lot of people (including me in the past) have spoken about such general rules of thumb. But that’s exactly what they are - GENERAL rules of thumb. They cannot be applicable to everyone. No two people, I repeat - NO two people can have the exact same portfolio, even if they are the same age or have the same income. Because a lot goes behind designing a portfolio. Age is just a generic parameter, because people assume that everyone goes through standard stages in life at more or less the same age.
That used to be true earlier - marriage before 30, kids by 32, and retirement at 60. But it’s not the case anymore.
So age is not the ideal parameter to determine how much money should be invested and where, and this rule should be taken with a pinch of salt.
Instead, you’re better off focusing on other aspects like:
Your goals (ummm, obviously!)
Duration (or time horizon) to your goals
Your income and expenses
Your risk-taking ability
Of these, the last one takes into account your life stage, your dependents, your psychological risk appetite and a lot more. And that’s why, it’s the most difficult to gauge.
This is where advisors come in. We hear a lot of influencers talk about investing in direct mutual fund plans and save that 0.5-1%. But that’s another practice you shouldn’t follow blindly.
The problem with a direct plan is - you don’t get a professional money manager to hand-hold you to make the right choice, and making the wrong choice with money is, well, disastrous.
The right advisor can, for example, suggest funds that’ll take your risk appetite into consideration and give you 12% returns. But just to save that 0.5-1%, if you opt for a direct plan and end up choosing the wrong fund, you could actually be making 8% instead of 12. Or worse, a risky fund could actually eat up your money in the near term due to the volatility.
It’s like following a diet by surfing Google or by going to a nutritionist. The second one may be slightly expensive, but has a professional guiding you, with higher chances of success.
So I really don’t understand why people bicker over that 1%, especially when financial education is so low in our country.
Now, how do you know which plan is better for you?
Whenever anyone asks me whether Direct Funds are good for them, I tell them to do this litmus test:
If you’ve invested in Mutual Funds looking only at past returns and/or AUM, you need a professional. Go for an AMFI registered Mutual Fund agent or SEBI registered advisor who can help you pick the right funds based on your goals and risk profile, even if they offer a regular plan.
But if you’re knowledgeable enough to look at multiple parameters (Standard Deviation, Alpha, Beta, other ratios) before investing, then you don’t need an intermediary. You’re better off investing in direct plans with Groww/Zerodha/INDMoney.
But where do you get these advisors?
Go for a fee-based investment advisor who will recommend Direct plans and charge you a yearly consultancy fee
Opt for an individual agent who will personally help you make these investments
Use a robo-advisory platform, which, as the name suggests, uses algorithms to determine your risk appetite and then suggests the right products to you
Mintd is a similar platform that assigns a risk score to you based on a few questions that you answer, and helps you make investments based on your risk profile. They claim to use a Nobel Prize winning algorithm to invest the user's money, which is then invested on auto-pilot. I tried it and made a small investment myself, and it worked pretty well. You can check it out HERE and let me know how you found it!
But all said and done, I hope you’ll be more diligent before following these general rules of thumb here onwards!
See you next week!
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