Financial success and Financial discipline comes only when you see things from your eyes
The idea for this post came last night when I saw an ad about mutual funds. Many would have watched this series of ads under the Mutual Sahi Hai series.
In this ad, the person complains to his friend that, listening to him, he invested in mutual funds six months ago, and instead of profits, he is experiencing losses. Then, the person says that the longer you stay on the mutual funds pitch without getting out, the better your chances of profiting. The person nods his head in approval, and the ad ends again, saying, "Mutual funds sahi hai."
Look at the way investments and savings were done previously
Go back 50-60 years in time and see how our elders used to make savings and investments. If they have to invest in land or any property, they study, research, experience, check, counter-verify, and only when they are convinced, they used to invest. Savings also had a different process. They used to plan for what they would save, how much they get when they saved in the post office when they saved in bank FD, or when they put it in chits, etc, and then make a decision. In short, they micromanaged their money and followed strict financial discipline. That's why they were successful.
Stock markets spoilt the financial discipline
Yes. It's the stock markets that spoilt this financial discipline that people of the 1960s, 70s, and 80s have so carefully built for themselves. Once Reliance became popular and Harshad Mehta made many rich using stock markets in the 1980s, people started moving into markets slowly. The trend picked up momentum with the liberalization of the 90s and the urge to earn more money. The problem is the stock market is, an art and science for those who learn it and a mere speculation tool for many who see it as a money-making machine. This made many people enter stock markets with little or no knowledge. Some made money through luck and many lost money and quietly retreated thinking stocks are not for them.
Mutual Funds are for these runaways only
Yes. Those who look at mutual funds, look at safety and comfort. What a portfolio of yours does on a micro-scale, mutual funds do on a macro scale. These companies also invest in stocks, but the risk gets diversified. You have a larger pool of companies for a smaller amount of money, so the risk is greatly reduced. But with risk, returns are also compromised. Understand that when you are trimming your losses, you are also trimming your profits on the upside. Nobody looks it that way. It is because the promoters of mutual funds have drilled this into your head: "Stocks give you huge losses when you have no knowledge about them. At mutual funds, we have experts who will take care and minimize those losses". What they don't tell you is, that your potential upside also gets capped due to more diversification, plus they also have their cut in your profits. What you get is after deducting all that.
Steps for financial discipline and right investing
Investment and savings are a must. You need that to secure your family's future and prevent yourself from falling into debt when an emergency arises. Here are the following things you need to keep in mind for getting that financial discipline.
1. Take charge of your investments: Spend half an hour time every day either to watch business news or to read a business page of your newspaper of read business newspapers. Investments and savings are your lifeline. Never give it into others' hands. Compared to 50 years ago, the World has grown, and making decisions is also tougher than in those times. But 30 minutes in a day is all you need to spend. Within 3 months, you will be ready.
2. Differentiate investments from savings: Many people think that investments and savings are the same. They are not. You invest for your money to multiply faster, taking a bit of a risk. The risk is, that you might lose some part of that money. But savings are done for a rainy day in life, and that money cannot be put to any risk. So, savings should be done only in risk-free instruments like FDs. So, decide in a month, how much you want to invest and how much you want to save.
3. Trading is only for extra cash for luxuries, it can't be a full-time job: Trading is a 21st-century thing. It was not there in India before 2000. Trading is speculation that gives you fast money through derivative instruments like Futures and Options. The risk will be very high. If investments can take away some of your money in losses, Futures trading can take away most of your money in losses, and Options trading can take away all of your money and more as losses. So, trading should be done occasionally and only for some luxuries you want in life. Some people think that they can run their house by trading in Futures and Options. Its ignorance. Stock markets are not designed for that. If you think that way, then it is your peril and you are cleaver by half.
4. Have insurance for life, health, and property: Insurance is a must and insurance is not for money multiplication. Understand this and stay away from ULIPs and other stock-linked plans. Take one life insurance for yourself, one health insurance to cover your family, and insurance to cover your property against any risk. That is enough. Do not look at anything else from insurance.
5. Financial discipline comes with self-discipline: Remember this: You are the master of your self and you are only responsible for everything that goes wrong with your family. So, have a disciplined life where you allocate time for your family, for your own fitness and well-being as well as enhancing your financial well-being. You can't give it in anyone's hands or trust anyone. Acquire the required knowledge and make wise investments. Initially, you might make some mistakes, but you will learn. Anyone under 40 can do it. Do not think that it is too late. Even at 40, you have a career of 20-25 years left, if you are disciplined. And lastly, when it comes to stocks, don't trust anyone and avoid mutual funds as much as you can.