Earning money is hard work. But managing it is both difficult and important. A personalised financial plan will help you reach your goals.
Those who follow tennis closely are aware that the once revered tennis legend Boris Becker was declared bankrupt by a London court last month. At his peak, his wealth was estimated to be almost $140 million. It is now at zero!
So how did a man with the means, power, and access to the best advisors in the world get into this situation? The reason is simple: lack of proper planning!
As discussed in the last piece (available here), every successful investment plan needs allocation to both equities (a la Sehwag) and debt (a la Dravid) for it to successfully meander through a variety of personal or external ups and downs. As far as Becker is concerned, he clearly seems to have missed a trick or two when it comes to investment planning and execution. Perhaps he bet on stuff which was never in sync with a plan.
So what are the takeaways from this unfortunate episode?
# Earning money is hard work! This is no secret. We don’t need to dwell upon how hard every successful person works in his/her life to achieve what they set out to do. Simply put, there are no shortcuts to success. Becker worked hard to amass immense wealth by playing and winning tennis tournaments all over the world.
# Earning money is only half the job done! Managing wealth to ensure that it not only helps achieve the desired personal goals in the future but also grows, is extremely important.
# A well-oiled, personalised financial plan to manage wealth needs serious thought, time and effort! Mere formulation of a plan is not enough. One needs the discipline and temperament to follow it till the end.
Boris Becker, while he succeeded on Point 1, looks like he did not pay much attention to Points 2 and 3. We are sure you don’t want this to happen to your wealth in the future.
So how do we go about:
- Identifying the goals that we have in life, and
- Formulating a plan to achieve each of these goals (irrespective of whether they are long-term or short-term)
What are your financial goals?
Let’s start by answering a simple question. Do you want your wealth to grow? The answer would obviously be a ‘yes’. If asked why and you might offer a number of reasons – get wealthy and retire quickly, go on an exotic vacation, buy a new car or a new house. All good answers that qualify as financial goals.
Each goal is tied to different points in your life’s journey. The exotic vacation may be scheduled for the coming year and the house in five years’ time depending upon your current earning levels. So, each goal is made up of two parts: What is the amount you need to fulfill the goal? And how much time do you have to accumulate this amount?
Prima facie, it isn’t too hard to think about your goals in life. They can either be short-term or long-term; exciting ones like a vacation, a sports car, or boring and more serious ones like buying a house, or providing for children’s higher education, etc. the bottom line is, that this exercise is an absolute must for every individual. Some of these thoughts and decisions might be easy, and for some, it may require a lot of deliberation – which is why it is hard work!
How to construct a plan for each of these goals
As explained in the first part of this article, there is no financial product that fits perfectly fit into every goal you have set. You will most likely need a combination of various products to help achieve your goals. Selection of right products for your goals is a very critical exercise (another reason why managing wealth is equally hard).
There is enough material available online, on various platforms, or with SEBI registered investment advisors to help you understand the features, benefits, and pitfalls of each of these products – which is why we won’t focus on products for this discussion. We would rather talk about the process of construction of a right plan for YOUR needs.
After you’ve listed your goals, you need to understand your risk appetite: A product is suitable for your goals if and only if it fits into your risk appetite or your perceptions towards risk taking. There are many financial risk profilers available with individual investment advisors, or online portals. You may approach any of them, or go through such tools yourself to understand more about your risk appetite. You need to be sure you will not lose sleep if the value of the invested product moves up and down.
For each of your goals, shortlist those products that simply match your investment timeline as well as your overall risk appetite. This means that you will have a different product shortlist for each of your goals. However, make sure you are comfortable with the risks taken by such products, which is why they need to match your risk appetite. A product which is a misfit, even if there is one of them, may mean that you will not be able to achieve your designated goal in the defined timeline.
Stick to the products and the plan you have just created, irrespective of any market movements - either for or against you. This is the most important aspect of sound wealth management practice. We have seen innumerable cases of plans not yielding as much as they initially were thought of, simply because the investors did not have the discipline or determination to follow them till the end. In most cases, investors withdraw from a plan when they see some market movements going against them. This, in our opinion, is a blunder – for lack of a more apt word. Review and re-chart, but do not abandon ship!
The entire exercise may sound daunting. For those who plan to do this the first time, it requires a significant amount of time and effort. However, just as there is no juice without the squeeze, there is no gain without this small effort– that you are most likely to put in, only once or twice in your entire life!
As a tennis player, Boris Becker has been a big inspiration. But his bankruptcy is a lesson for all us to be serious about managing their money and achieving their goals in life. Plan your way to financial freedom. Happy investing!
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