Why Indians need financial advisors?
“I want a risk free investment option that gives me a good return”
Well, this is what we often hear from clients.
Risk and return
Most Indians do not understand the correlation between risk and return. Everyone wants a high return without assuming any short-term volatility. There is a direct relationship between risk and return. If you want a high return, there will be high risk (volatility) in the short-term. This is the reason linking return with time horizon or goals makes complete sense.
Why should anyone lose money, after all, it’s your hard-earned money? However, it’s equally important to know that short-term volatility has no bearing on long-term returns. We should delink associating short-term volatility with investment risk.
Laid back attitude
How much you earn has nothing to do with how much wealth you accumulate. Often ‘being rich’ is attributed to ‘he must have done something wrong, that’s why he has money’. Making money in life is all about attitude. This is precisely the reason everyone from IIT/IIM is not a millionaire. And those who are, may not be cheats!
Bias towards physical assets
Something that you touch and feel gives you a sense that you own it and probably you can show to others. That’s why the love for gold and real estate. These are also asset classes that have their own return cycles. For the last few years, both of these classes have not delivered great returns to the investor. These may be part of the portfolio, but not all of it.
Saving versus investment
A lot of people feel that they are saving enough without realising that money lying in their savings account is not an investment. You need to take corrective action in diverting those funds in right financial instruments so that your saved money grows well beyond inflation.
Understand ‘time value of money’ concept is critical. Often, we do not understand that growth in wealth is a long-term phenomenon. We either get involved in trading for short-term gains (turns into losses though) or don’t invest for long-term at all.
The language of products
In India, people are more comfortable talking in the language of investment products rather than their own requirements. This is precisely the reason that you get enticed by an insurance agent to buy an insurance product that delivers less than 5% return (ULIPs, endowment, LIC policies etc.). A better approach should be to reflect on your needs and accordingly evaluate investment products.
Advice for free
Everyone wants advice for free. If you fall ill, you always have a choice to buy over the counter medicine from a pharmacist or consult a doctor. Although the trend is changing, still a majority of Indians think that they get quality advice without paying anything.
How will equity market perform in 2018? All the investment news channels forecast how will be the next year. Isn’t that speculative and not investing. Additionally, most of the retail investors would apply for IPOs to make listing gains. Think about it, IPOs are exit options for promoters, why would a promoter sell his shares for cheap?
When you hire a financial advisor, you outsource the job of money management to him/her. One of the value-add that a financial advisor brings to the table is to navigate you through the markets without getting impacted by the above-mentioned biases.