I
invited 2 of my clients —let’s call them Sanjay and Vijay-- over for dinner
once. After dinner, we sat down for a
chat and the conversation turned to property, equity market, retirement and
lifestyle. Who is more likely to have a more secure retirement and why? I just
listened to their respective points of views without agreeing or disagreeing to
their points of view/
Background
Sanjay
is a top marketing executive—based out of Mumbai-- in an Indian company having operations
all over the globe—drawing an enviable eight figure package. He owns a flat in
Salt Lake City, Kolkata where his family lives. He has also invested in a flat
in Rajarhat. He strongly believes in safety of capital and so has invested a
bulk of his savings in bank fixed deposits. He has a small investment in mutual
funds also (small compared to his total investments/savings). He has at most
5-6 years for his retirement. Having
been a busy professional, he does not have much interest in managing money. He firmly thought that with bank fixed deposits
and a flat in Salt Lake his retirement was secured.
Vijay—a
first generation entrepreneur —had far more calculated approach towards his
finances. He was very clear about creating a 2nd. earning member for his family
when he retired. He started to set aside a fixed sum every month towards SIPs
in equity mutual funds knowing that he is not going to need the money for at
least twenty years till his only daughter was ready to pursue higher education.
He also had a small portfolio invested in equity shares.
So now the question was who is doing better?
Sanjay or Vijay?
Despite
Sanjay’s confidence of a secured retirement, Vijay was far better placed in
terms of a secured retirement owing to following points:-
Firstly,
Sanjay failed to realize that retirement requires a regular cash flow. His
investments in Salt Lake flat in and fixed deposits will not be able to
generate the monthly cash flows needed to sustain the lifestyle that he was used
to all these years. Moreover, being a private sector employee, he does not have
the security of post retirement income viz pension which can augment his monthly
cash requirement.
Secondly,
Vijay understood equity better. He knew that only equity as an asset class can
deliver returns in excess of inflation but only over long term. He was also
very clear that he was not going
to need the money for next 20 years or so. So he ignored the short term market fluctuations—fully
confident that the long term trend of the market was up. He started SIPs in
equity funds to run for 20 years—coinciding with the time his daughter was
ready for higher education. He will have a corpus ready for it and will not have
to dip into his retirement corpus.
Thirdly,
Vijay operated from a point of expertise. While Sanjay failed to realize or
overlooked the fact that his core assets—Rajarhat flat and bank deposits were
not generating regular income in excess of inflation. They were on the other
hand losing money—deposits by earning less than inflation and the flat by way
of maintenance charges and taxes. Vijay’s portfolio on the other hand was
earning positive returns. He focused –and rightly so-- on annualized returns rather
than annual returns.
Sanjay was convinced that he was better off
compared to Vijay. Many of us live under the same illusion. We overlook the
wisdom of people like Vijay, who align their life, expertise, income and future
to their assets. Such an approach helps in managing risks better. Instead, we
approach life like Sanjay. We are happy with scattered residential property
that earns too little income; we focus too much on the current job and
resultant cash flows; we do not explore the need for additional income to
protect us during bad times or retirement.
How we work with our assets and the incomes
they generate critically determine how secure our financial lives will be. What
are the lessons?
- Owning assets means little if they are not made to work hard to generate income. In other words your investments have to work harder than you do.
- The assets that are core, huge, and not intended to be sold, should be in prime shape and not remain idle.
- Investing in expertise in managing assets is important to make the most out of them after all it is said that managing money requires more skill than making it.
- Assets should be diverse in terms of their nature, location, and productivity, so that the risks are lower.
- One is not wealthy based on the asset one owns, but on the basis of how he manages them. Before blindly accumulating assets, pause to consider: how you will get them to work for you and your future?
