My years of practice as a financial planner, I met several successful from common person to CEO’s MD’s of the company’s business men ,respected intellectuals in their fields earned millions of rupees but paid little attention to their financial planning. While analyzing their investment portfolio I observed some common mistakes people often commit. Some of the commonly committing mistakes I have narrated it below. If avoid these mistakes even a common person can make his financial planning successful to the large extent.
1. Setting financial targets
2. Importance of liquidity
3. Over exposure to either fixed income or equities
4. Treating life insurance as an investment tool
5. Inadequate amount of health insurance coverage
6. Over weight to previous performers/ track record of the scheme
7. Exersing the option of selling
Setting financial targets :-
It is a first & most important step. It should be more realistic than dramatize. We need to consider many major & minute issues such as monthly income, monthly & annual fixed expenses, age, responsibilities, current life style & aspiration of post retirement life style, all such issues should co relate with present inflection & adoptive of future inflection also.
So for the better planning & implementation purpose target should divide in three phases that is short term, medium & long term goals. Periodical review & changes in goals after accomplishing the first is a better option & for these reasons policies have to be flexible & accommodative.
Importance of liquidity :-
Human life is full of surprises. How so ever people try to make full proof plan, destiny always has an upper hand & prepared to surprise us. To cope up with those surprises only available option with us is through contingencies plan by maintaining sufficient cash reserve or liquidity. I have seen people with good monthly income facing difficulties in just couple of months when they lose their jobs. Thanks to poor financial planning & thanks to credit cards as well which tempt people to reckless shopping.
Over exposure to either fixed income or equities :-
It has been observed that people are either over cautious & skeptical or over aggressive in investment. Both things are not good. With over cautious approach people prefer fixed income options where return on investments are low. While second strategy of over aggressive in equity we carry excessive amount of risk which is just uncalled for. Instead of it there should be balanced approach. Decision about equity & fixed income investment depends upon many things i.e. age, income, financial targets, responsibility, risk appetite capacity etc.
Treating life insurance as an investment tool :-
Why people are so fond of insurance policies is a million dollar question now a days. Without accessing an amount of coverage required, without getting in to the schemes details people purchases those randomly purely as an instrument for the purpose of tax saving. But we forget the basis difference in two concepts i.e. purpose of investment is creation of wealth where as life insurance purpose is financial compensation from the life threats. Over exposure to any type of insurance policies are likely to the overspending on it than to receive from it.
Inadequate amount of Health insurance coverage:-
Similar to life insurance people in general are least informed about their health insurance policies. The way medical treatments cost is souring up in its proportionate amount of coverage should also needs to increase besides the age, medical history, hereditary, etc. but unfortunately neither at the time of investment nor at the time of its renewal we considers all these issues. As well as another blunder mistake in health insurance is family floater. If any one insured family member required expensive medical treatment then in that case other family members remains unprotected till the next policy renewal. Option of Add on shopping is not supposed to apply in all areas & at least not in finance / insurance. So better to have separate health insurance coverage for every family person.
Over weight to previous performers/ track record of the scheme: –
The concept is more related with market related investment instruments. Market dynamics because of industrial cycle, govt. Rules & policies, tax policies can affect or change the scheme/stocks future performance. So these things should also be considered while observing past performance. After all it does not give guaranty of future performance, so shall not over emphasis on past performance.
Exersing the option of selling :-
As the entry or purchase decision is important, selling of stock / units ( in case of mutual fund investment) are equally important. Any market related investment be it equity or mutual fund, to book the profit / exit from the scheme or stock is equally important. In its absence that profit remains only on the paper. It is observed that people once invest in any stock or scheme remains invested, without keeping track record of their investment.