Numbers vs Feelings

Numbers vs Feelings

Investing and planning for your future can't work with guesswork. Precise numbers and calculations are needed

 

By Dhirendra Kumar | Jul 14, 2017

Recently, I interacted with a group of investors at an event. Almost all of them had made a substantial amount of investments, mostly of the tax saving kind. More than half had investments in equity funds of one kind or another. However, an interaction with one investor stuck me as particularly interesting. In about an hour of analysing his investments, he swung from being vaguely unhappy to supremely confident to somewhat scared about the future.

My friend, who is in his mid-40s, had been investing in mutual funds for about twenty years. In all these years, he and his wife have invested different amounts--mostly equity funds--in a sporadic manner. Most of the investments were around twenty to thirty thousand rupees at a time, although less in the earlier years. They've never kept a precise track of how much they invested and what the gains are. Still, unlike many such investors, they had dumped all the paperwork and statements in two big box files and kept them safely. They had a vague notion that in all these years, he had invested about R20-30 lakh, most of it in the last decade, and that it was worth around R50-70 lakh.

Finally, one day, with a few hours of hard work in organizing everything, and then quickly entering the information online and checking their Portfolio, they got to know what exactly was happening with their investments. To their pleasant surprise (actually, wild joy), it turned out that the investments were worth almost Rs Two Crore.

The power of equity investments, and of compounding over long periods of time, had created a bonanza. From feeling like middle-class couple struggling to save a substantial amount of money, they went straight to feeling prosperous. In a matter of just an hour, they had decided which model of car from a German marque they would buy, and had a tentative list of the countries they should visit on their forthcoming foreign vacation.

Unfortunately, the feeling didn't last long. I urged them to try and project forward and see how much money they would need. With two children's higher education coming up, and about fifteen years to retirement, one couldn't just go by 'feeling prosperous' or even rules of thumb. Actual calculations that took into account compounding investments as well as compounding inflation were needed. Post-retirement expenses had to be projected it into the far future, along with some idea of the changing expense pattern as one gets older.

The net result of all this was that my friends' outlook on life took another U-turn. From feeling prosperous and thinking about German cars and Italian evenings, they started feeling seriously worried about the future. At their current rate of saving, they just wouldn't have enough money for all the expenses, as well as sustain themselves after retirement. Even if they worked till 65, they would have another 25 years of expenses to sustain.

Even a rough calculation of inflation and expenses over a quarter of a century is a frightening experience. Doing such calculations and absorbing their implications is always a sobering experience and almost always has people scrambling to start saving more.

Why does this happen? The immediate answer is that most of us don't plan our finances. However, the most frequent underlying cause is an inability to run the numbers.

Some of us understand the magic of compounding on investments, but very few manage to apply compounding to expenses and inflation and then get a feel of what that means for their own future. I'm not blaming anyone, the maths is more complex than what we need for our everyday lives.

However, today, with the easy availability of online tools and knowledge, there are few excuses not to do so. Securing your financial future, planning for it and investing for it is basically about numbers. We all owe it to ourselves to learn at least a little bit about it.

Happy Investing

Source:Valueresearch.com