Recently heard people in my peer groups discussing criteria for selection of schools, education boards and so on. I realized one can draw many parallels with investment philosophy and thought we'd do a "School Selection and Financial Decisions" series.
One thing I realised is the old criteria of selection - distance of the school from your home, the cultural, and extra-curricular activities, the quality of the teaching staff have a diminishing relevance. After all, if all the child's friends in your residential complex are going to IB and other fancy schools, you'd be mad to enroll anywhere else, even when you know you cannot financially afford it. Financial incapacity is just one of many other psychosocial reasons one has to consider.
"All my colleagues have enrolled their children in the Cambridge board."
"They follow the international board of education. They have very high standards, and we need to give the best to our child".
There is a great pressure in urban India to enroll children in the most fancy schools. Some want to associate with the class of families that the majority of the school children come from. For some it is unthinkable that they do something that will be looked down upon by colleagues, friends, etc. For some it is just an aspiration to give the best to their children. Without jumping headfirst in the topic of criteria of school selection, we will look at the parallels with investment decisions.
In this article we will look at peer pressure looking up to people around us and taking decisions to "fit in" - the parents who do not want to be outsiders amongst their office colleagues or residential complex.
Everyone is exposed to peers, colleagues, friends, relatives discussing financial investments and what has worked for them. Funnily, the "what worked for me" story is different for every individual or group you come across. Somone might be raking it in by trading Cryptos, someone always talks of hot tips on penny stocks, or you see your driver trading F&Os while waiting at signals. It is normal to feel the pressure to act, even if it is non-verbal like in case of your driver. However, fall for this pressure and you are in a trap.
You might actually benefit initially and your mind says, "this is what works, they were right... I was missing on this for so long.", only to realize much later that actually it doesn't. One big loss, and you realize you can't stomach the risk that your boss can, or that you do not have enough liquidity to cover the F&O loss, or you've ended up with stocks that you just cannot sell as they have lost a large chunk of their value or a scattered mutual fund portfolio with multiple funds, large overlap, no alignment with your goals. After a few years you wonder why your equity portfolio is performing so poorly. At this point, switching to a focused, goal-oriented portfolio might be tricky as transaction might expose you to capital gains and taxation.
Avoid the trap. Simple, boring investment that has worked for you till now will keep working for you. A few, well selected mutual fund schemes will give you great returns even if they keep matching their benchmark performances. Investments and trading have different returns, different risks.
Another important thing to highlight here is the time horizon and expectation from the investment. If you want to invest now for a goal 2-3 years, going for an ultra-high-risk fund just because it is working well for someone else is not a sound option. If it is in its upward cycle (and generally is when someone close to you recommends it), you might get away with it. But just image the fund has peaked and by the time you want the money in 2 or 3 years, you haven't got the returns you expected. The immediate reaction is to blame the poor performance of the fund or bad advice from your favourite finfluencer. However, the reason of poor returns is opting for a high-risk equity fund for a 3-year goal in the first place. Those who have not seen market downtrends and feel the funds always give 14% or more returns, might get away once or twice with such investment decisions, but are definitely in for a hard landing over a period of time.
Those of you who are in this cycle, remember, different people will have different tools that worked for them. Using all these tools for yourself might not; or rather, will not, work for you.
So, what do you do?
1. The first step of any investment decision is planning for specific goals. With goal-oriented planning one can allocate hard earned money in avenues aimed for one's goals. The investment horizon also gets captured here. This is the easy part.
2. Take in all the unavoidable external inputs (information you get from external sources, colleagues, finfluencers, etc.), but do not immediately react by taking action on all the incoming information. Do not doubt your well-planned investments. Study the inputs, analyse what is relevant to your goals, consider the time horizons of your goals and whether the inputs fall in place, if you find opportunities that might augment your portfolio, study these categories in detail before making any decision. At the very least, avoid choosing categories or schemes that you already have in your basket.
The last bit is tricky. For your long-term investments, it is best to invest and develop a short-term memory loss. For long term equity investments, at least for 3-4 years avoid looking at CAGRs and XIRRs. Review once a year only to check the governance - changes in management, macro trends, change of investment philosophy of a mutual fund scheme, etc.
To conclude, filter out and do not get influenced by all the external noises. If something is working for you great. If, you are exposed to something that you feel falls in line with your goals and requirements and risk appetite, then study it, understand it before jumping into it headfirst.
Comments
Post a Comment