133. (1. Building Finance Intuition) Tyranny of standard advice
“I always pass on good advice. It is the only thing to do with it. It is never of any use to oneself.” — Oscar Wilde
I have been asked to write on personal finance matters for some time now. I considered starting a separate newsletter to cover that area — mainly because not everyone is interested in financial topics. I do believe that becoming financially independent is one of the most important goals to achieve (as early as one reasonably can) because it has potential to liberate the self as well as reducing stress and improving health and relationships. Just to be sure, by financial independence I do not mean quitting job or shutting down business/profession. All I mean is a state where you do not have to work anymore for the sake of making money to meet your financial obligations. After serious consideration, I decided not to start another newsletter. For one thing, that will entail unnecessary administrative work on my part but more importantly, striving for financial wealth creation is a particular case of “Making Better Decisions”, anyway.
From now on, I intend to publish one or two articles a month on personal financial matters as part of my newsletter — “Making Better Decisions”. As such, my objective is not to cover the latest market updates or new product launches or forecasting market peaks and troughs. I will not dispense views on specific investment products. My objective is to help build intuition for personal financial matters such as: should I purchase this attractive new product that my bank relationship manager so convincingly presented to me? The bank says I qualify for a home loan but can I really afford the loan? Is renting a house better or buying one? How do I assess a mutual fund? Is gold a good investment? Funding retirement vs funding a child’s education — which is higher priority? What about child’s marriage? Why do many struggle to recognize the criticality of retirement goal no matter how old or young one is? What does retirement mean anyway?
I will not be revealing any secret formulae for financial success. I am not aware of any such secrets nor do I believe that they exist.
One surprisingly simple and easily accessible path to financial independence is: increase earnings, live well within your means and invest your savings judiciously. Over the long run (typically between 10 and 20 years), you should be home — as in, financially independent. This should work for most people.
“There’s no path to success. Everyone constructs their own path. The important thing is to follow your heart. Find your niche, is my best advice.” — Karol G
Let me start with what I found to be among the most controversial topics in personal finance. Is buying real estate a good financial decision? House typically happens to be the highest value asset that one typically possesses. This is true for almost all my friends, relatives and acquaintances irrespective of where they live — most of them live in India and the US and a spattering in UK, Australia, Netherlands, Germany, Singapore etc. For a long time, I used to believe that real estate is generally a very ordinary investment and typically comes in the way of creating meaningful long-term wealth. This is despite actually knowing folks who realized extraordinary returns on real estate while taking on very little risk. But these were exceptions — for the majority of people I know, investments in real estate have actually held them back in their wealth creation journey.
But my view on this changed several years ago. I now believe that real estate may be a great method of creating wealth for few and equally, may be unsuitable for few others. I realize that this ambivalence applies to stocks, mutual funds, PMS/Hedge funds, gold, bank deposits and every other asset class out there. The problem I find is that one can fully justify any argument for or against any standardized view. Most standard advice is generally of limited use. The only meaningful advice is one that helps one move the needle of their life in the intended (right) direction — everything else is “financial” carbs.
“It takes nearly as much ability to know how to profit by good advice as to know how to act for one’s self.” — Francois de La Rochefoucauld
For an advice to result in meaningful progress, it has to be made in the context of an individual — personalized advice. For example, for someone who has trouble being disciplined, perhaps an investment in real estate makes sense because it forces discipline in terms of monthly EMI payments. But, for someone who is disciplined and has no trouble delaying gratification, investment in an asset class like Equity Mutual Funds (perhaps via a variant of automated or manual SIP) may make more sense. For someone who has earned, saved and invested well and thereby developed a large financial corpus, perhaps high allocation to conservative assets like fixed income funds may be appropriate particularly if the person is risk averse by nature. Even so, one could also argue for large equity allocation if the needs of that person can be met with a tiny fraction (via dividends, say) of the corpus.
Our risk profiles are dynamic. Advances in the field of behavioral economics have firmly established that we become more risk averse upon making profits (that is why we are generally quick to book profits) but more risk taking in the face of losses. Our risk profile may change with expanding our knowledge base and life’s experiences. Changes in our circumstances — a like new job or job loss, marriage, birth of a child, health situations etc — may necessitate a change in our goals and risk nature. The appropriate strategy for financial growth will also change accordingly.
Bottomline
“Nothing is so useless as a general maxim.” — Thomas B. Macaulay
The only advice that makes sense is one that you can stick with and by doing so, helps you make meaningful progress. Most standard advice, by their very design, is not practical. To give you an analogy, “eating too many carbs is bad” may be generally true but when one comes down to implementing it, what does “too many” carbs mean? Are 200 grams/day too many or perhaps 400 grams? If you are an endurance athlete, eating too many carbs is actually desired. “Real estate” is a good investment — does this mean you should extend as much as you can make the largest possible real estate investment? Do you buy an apartment or a landed property? A 60:40 asset allocation between equity and debt — is this the ideal allocation for long term wealth creation for someone who starts out with no capital and someone who starts out with large (inherited, say) capital? Standard advice may at best be a good starting point. Useful advice necessarily reflects your personal context.
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Thanks for taking time to read this. In this newsletter, I share my learnings that could help you improve your decisions and make meaningful progress on your goals. I try to share stuff that I have personally experienced or experimented with. If you find this newsletter worthwhile and if you do not mind it, please do consider sharing it with others.
A bit on my background
I help people make better decisions.
I coach people on “Making Better Decisions”, “Financial Intuition” and “Building Great Careers”. I’m open to run sessions on these topics in institutions — this will help me create larger impact.
I’m also an Investment Advisor (RIA) registered with the Securities and the Exchange Board of India (SEBI). As an RIA, I analyze and prepare financial plans to help people achieve their financial goals.
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