What not to do in 2011

It is almost a truism that most people need basic financial literacy and it’s generally assumed that this literacy must take the form of knowing what to do with money. However, the truth could be exactly the opposite. It would be far more useful for people to instead learn what not to do with their money and this education is not available anywhere.

We try to list here below some don’t dos for you for 2011. The idea is enable you to do few right things and prevent you from making big mistakes. Jaago investor jaago……

Thou shalt not blindly buy high return products

One thing that frauds like the one at Citi bank may have taught us is that there cannot be any investments without “risks”. Promise of high return without commensurate higher degree of risks is just not possible. Structured products are good only if you invest after understanding it. Else avoiding them will not prove to be disastrous to your hard earned money! Follow KIS----keep it simple

Thou shalt not leverage

There can be products that although pass the test of legality, are best to avoid. Consider an investor who prefers to invest in blue chip stocks and prefers to hold them for long term. Such an investor will invariably be brain washed by his friendly broker to leverage his holdings by investing in derivatives. We have come across brokers who try to impress upon their clients that holding on to blue chip stocks for long term is a foolish thing to do, since the client misses out on the massive returns that can be his. The client will be encouraged to trade in derivatives and take home the high returns that derivative segment supposedly offers. The client becomes aware of the risk part of the derivative segment but only after it is too late—the client invariably loses not only his blue chip holdings but also his faith in the market and its intermediaries. The client is gone for good.

Thou shalt buy term insurance

It has been proved that Indians are under-insured. We do not have enough cover. Term insurance is hardly ever recommended by your “family insurance agent”. This is because an endowment or ULIP will fetch them far more commission that a term insurance policy. That term insurance is the basic financial product that everyone should buy in big numbers is understood but rarely followed. One of the basic principles of financial planning is that your family’s future should first be secured by way of adequate insurance coverage—term insurance in other words.

For the investor, not doing the wrong things should actually be learnt before doing the right things. Unfortunately, this is something that they’re likely to learn the hard way