Event-based investing – Is it the right way to go?

Last week was Akshaya Tritiya -- an auspicious day for Hindus and Jains. Over time the significance of the day has got lost in the cacophony of gold marketing companies. Newspapers, magazines and television channels are full of advertisements mentioning the importance of buying gold on this day. 

Throughout the year, days like Akshaya Tritiya are hyped in the media to lure the unsuspecting investor. Another such day is Dhanteras (just before Diwali). Not that there is anything wrong in investing on these days. But investing has to be methodical, and not driven by festivals and marketing strategies. They should be the exception and not the rule.

Most investors invest erratically – such as on their children’s birthdays and during ‘JFM’ (January, February, March) to ensure some income tax deduction. The idea behind such haphazard investments maybe good. But then such investments start and end on that very day. There are no further investments till another auspicious day, or a birthday or the JFM period arrives.

There are several pitfalls of engaging in event-based investing are:

Firstly, what this results in is an ad hoc, unfocussed investing pattern which really does not get you anywhere. The amount of investment purely depends on availability of funds on that particular day. There is no fixed amount being invested. Such haphazard investment will not lead you to your goal.

Secondly, though there could be a goal mapped to a particular investment, generally such investments are not backed by any mathematical calculation. Investors don’t address questions  such as – how much do I need at the end of the term?; have I accounted for inflation while computing the goal?  It’s a simple exercise of stashing away funds.

Thirdly, in cases where the saving is forced (such as in tax-saving investments), there is obviously no goal. In most cases, there is focus on the product too. It’s a simple rush-job to meet the deadline. Most people are not even aware where they have dumped the money, let alone looking at returns.

Fourthly, there is quite obviously no analysis or research done on whether the product is suitable for you or not. Such investors neither do a risk analysis nor have look at their asset allocation. Their decisions are based on hearsay and tradition. This generally leads to a situation where they put all the eggs in one basket.

Fifthly, because of the demand pressure, the price (typically of gold) tends to move up. With a ‘single-day’ lump sum investment being made on these days, you tend to buy at the highest point with no chance of getting the benefit of ‘rupee cost averaging’. In the long run (of say 15-20 years), this generally does not give you the best possible returns.

 

People who engage in ‘event-based’ investing believe that they are ‘planning’. But in reality, they are only planning to fail. With little or no mind put to various critical issues, the end result can only be a disaster. So I would suggest that put away additional amounts on such events, but plan your investments across the year through proper financial planning. Achieve your goals in a planned and focussed manner, leading your family to financial wellness.

Don’t place all your eggs in the ‘property’ basket

In September this year, I met Deepak and Saloni – a DINK (double income, no kids) couple – who wanted my financial planning services. This young couple earned well, but had parked all their investments in one asset class – property. They had a portfolio of five houses, a term plan, a mutual funds portfolio worth a few thousands and some shares. We started discussions  0n  financial planning. By the time I visited them again – in October – they had added one more property to their list.

I had another interaction with a couple in their forties with a similar story – they too had parked all their investments in property. Four, to be precise. The rest of their money lay in their savings account.

A recent email from a client mentioned that “I am also actively considering investing in real estate - sometime after July next year by re-allocating funds from the MF portfolio... as real estate tends to provide the best long term appreciation.”

We have been taught to ‘invest in property and LIC policies, as their value never goes down and will always fetch you positive returns’.

In the cases I have listed above, and plenty more, property is only investment asset class. There seems to be a craze for buying property so much so that we tend to lose focus on all other forms of investments. This has been further ‘confirmed’ by the boom in real estate over the past 7-8 years.

Disadvantage of investing only in property:

• ·     The biggest disadvantage with real estate is that it is an illiquid investment.

• · You need to spend on its maintenance and also pay taxes and duties.

• · Speculation is rampant in the real estate industry. These speculators make lump-sum purchases during a boom, without bothering about the purchasing cost and the ongoing costs such as maintenance.

Now, I am not implying that real estate is a bad instrument for investment. But it becomes dangerous when it is the only asset class that one invests in. Here, of course, I should mention that the ‘first house’ (which is bought for the purpose of residence) is not being included assuming that it is not for resale.

With the ‘pressure’ created by real estate brokers and builders that the rates are going up every day, lay investors fall for the trap, thinking that it is now or never. With property prices sky-rocketing across urban and semi-urban areas, larger chunks of money are required to fund even the down-payment. For a salaried person, this may not always be easy.

A number of investors fall for the “initial payment of 10 percent only” trap. Without even calculating how they will service the balance down payment and subsequent equated monthly instalments (EMIs), people rush in in the hope of making a quick buck. They often sell-off the booking when the second instalment becomes due. This is a gamble which could go seriously wrong.

With financial planning and proper management, you can own your dream house.

A few points that one should keep in mind before investing only in property:

• Illiquid asset: Since it is an illiquid asset, it can have serious repercussions in case there is an emergency. Lack of liquidity can lead to a distress sale. If there is a medical emergency and you require a few lakh rupees, you would have no choice but to sell off the house (which could be worth  much more) to fund that immediate requirement.

• Property prices can fall: We have an innate ‘belief’ that the prices of property only go up. This is a generalised statement. It could always happen that the area / locality / city where you have purchased your property may not grow due to certain factors, beyond your control.

• Long-term returns may not be the best: Another strong notion that we carry is that property gives the best returns in the long term. Now this is true depending on your definition of ‘long-term’. If in your definition, long-term is 3-5 years, then you may be right. But it has been seen that over 25-30 year periods, equities have delivered the best returns. There are studies to prove this.

• Can affect your goals: Financial planning through property alone  is like putting all your eggs in one basket. It can affect meeting your goals since there may not be a buyer when you wish to sell, at the time of your goal.

One should have a robust, diversified and liquid portfolio, to ensure sufficient liquidity before ‘investing’ in property. 

People should carefully plan their investments to meet their goals in an organised and structured manner with due importance to asset allocation. Putting all the eggs in to one basket  could lead to severe consequences.

The importance of taking a timely and well-informed decision

I recently shifted my residence within the same locality. As I was rushed for time (due to my travelling schedules) I had only five days between the day I came back from an outstation visit and the day of the ‘grihapravesh pooja’. The packers and movers had to be organised and all the stuff had to be shifted before the date of the ‘pooja’.

I called for quotes from three packers, selected a new and young (in terms of experience) packer whose quote was quite obviously, the lowest. So far so good (or so I thought).

Shifting day finally arrived and the chaos began. Wherever I was around I got the cartons packed the way I wanted them and marked the boxes with the contents. But since I could not be at all places at the same time, trouble began to get packed. When I enquired what was in the boxes, they said it was ‘mixed’. Basically those boxes got shifted without any marking of the contents.

Worse was to follow. The packers opened up the boxes and piled up the contents into drawers and cupboards at their own will. Since the contents were ‘mixed’ there was no one proper place for the contents to be emptied into. So they just got dumped into the first open drawer. I did not realise it then, but all hell had broken lose.

Within a few days of the shifting, my younger son had to be hospitalised and when the hospital asked me for the health insurance card or policy, I was at sea. I rushed home and searched high and low, but could not track the papers. The reason being, all the contents had been mixed and were lying somewhere. Now where that somewhere was, I had no clue. Anyway, I called the insurance company and they helped me dig up the policy papers from their records. All’s well that ends well, but it was a huge learning for me.

Let me try and co-relate this with my field of work – financial planning. If I had applied the same principles to my shifting I would have been so well off and none of this madness would have occurred.

• We leave all our investments and planning for the last minute because we are in a job or are running a business and are unable to find time. Only when the issue is right upon our head (when the accounts department says show me your tax-saving investments or the taxes will be deducted from your next three-four months’ salary) do we rush to make the investments. As Sophocles (one of the classical Athens’ three great tragic playwrights) said “Quick decisions are unsafe decisions.”
• We start planning or look for a financial planner only when we have been hit by a ‘reality bomb’ – this is when reality strikes you (one fine morning) and we realise that we have no investments to speak of or all the investments are making a loss.
• We then rush to friends, neighbours and colleagues to ask for references. Again, since there is not enough time we cannot do a background check and go with our gut feel.
• The previous decision in most cases is primarily based on the quote or the rate being charged. The cheaper the better. “Why should one waste money on such a mundane activity”. What we do not realise is that there is a price for quality. In my case, the ‘rookie’ packers were cheaper than the established names (who have a track record to show), but they made a complete mess by not labelling and packing stuff haphazardly. Finally, I had to bear the brunt. So much for bargain hunting. Plato has rightly said “A good decision is based on knowledge and not on numbers.”
• Now comes the more serious part of ‘mixing’. Based on the quality of your packer (read: financial advisor), the packing (read: advice given) is based purely on finishing the job at hand (read: getting your signature on the forms) as early as possible with giving as much as a second thought of how you, as a customer, would have to deal with a situation, later on. The idea is to move to the next customer as quickly as possible. So haphazard and unnecessary products are recommended where there is a mix of all kinds (like mixing health insurance and investment returns or life insurance and investment returns). It is only later on when you open the carton (read: policy document) do you realise that you cannot figure out head or tail of the contents. You are not even sure that whether what you are looking for is there in that particular carton.
• In times of emergency, one is at a loss at to which instrument should I redeem or sell, since all the products are ‘mixed investment products’. If only, care had been taken right in the beginning, as to why a product was being purchased and the investments had been clearly marked to each goal, the investor would not be at sea. If each carton had been properly marked with the contents, unpacking becomes so much easier. In other words, clothes are not put in the same carton as office papers.

Life becomes so much easier if we plan properly (be it our shifting or for our future goals) and have sufficient time to evaluate options and select the best-suited rather than rushing decisions. Finally, it is vital that we take well-informed decisions – selecting the right advisor (packer) and clearly demarcating the investments and not mixing the contents.