Investing Obstacles to Conquer:

The beauty lies in the eyes of the beholder. The measure of anyone's personal or financial success is also a very subjective term. Similarly, the obstacles on the journey to financial success also differ from person to person. What may be challenging for one person may not seem so for the other person. In this article, we will talk about the common obstacles that keep you away from being a successful investor and from fully realising your financial goals.

Getting driven by emotions:

There are many emotions at play when it comes to money. The most prominent and commonly observed emotions are greed, herd mentality, fear, overconfidence, biases and ego. Each of these emotions may play a role in decision making and force you subconsciously to make bad financial decisions. Let us see how.

Greed drives a person to make decisions anticipating quick money. Unfortunately, such things often end up burning your money. Herd mentality is where you follow the market or others even though logic may point you to go in another direction. Fear is where you are trapped in a negative mindset and believe that the worst is yet to come when the markets are going through a bad phase. You will likely give up when things are going bad when in fact, an opposite action may be required. Overconfidence is where you believe that your understanding or knowledge is superior to others and you are 'right'. With overconfidence, you may not listen to sane advice or be open to contradictory info. Biasness is where you establish an emotional bond with any particular investment or product either positively or negatively. This positive or negative emotion will not let you evaluate any investment objectively and you may end up taking biased decisions. Ego is where you take a stand to protect your word and not accept any mistake or failure on your part. Ego in financial matters may even force you to take decisions which are clearly risky.

Over-monitoring your equity investments:

Financial assets and investments are perhaps the only long term investment which we tend to measure almost on a daily basis. We never measure the value of our property or the second home we bought. We never evaluate the value of jewellery or gold we have saved for our daughter. We even do not care to see the value of almost every traditional investment product like bank fixed deposit, ULIP policy, PPF, NSC, NPS, etc. The only thing we are interested in knowing on a daily basis is the value of your equity portfolio, irrespective of how much share it has in your total portfolio. Why are we doing that?

Your equity investments, especially those in mutual fund equity schemes are your long term investment assets. It would be just ok if you looked at their value – say on a monthly frequency. The evaluation of the portfolio should be done on a yearly basis or half-yearly basis at most. Over monitoring your portfolio will force you to see short term performance which may not be the right thing to do. It will also only increase your anxiety and give needless stress to you.

Being unclear about your goals:

For any target to be achieved, you need a plan. Without a plan, a goal, nothing worthwhile can be achieved. An average person's life can be seen as a long list of personal and financial goals. On this list are things like the purchase of a car, home, child's tuition and education fees, marriage planning, holidays, second home, retirement kitty, starting a business, and so on. However, we have limited resources in our hands in the form of our salary or business income.

The need to define goals can never be underestimated. The big mistake that people do is to not really plan for their financial goals and the primary obstacle to achieving the same.

Ignoring real financial problems:

There are many around us who are earning well but often find very little money to save. There are also many others who have loan EMIs almost equal to their income. We often find that people in their early career having much more expensive mobile phones compared to their bosses! But there are also others who may not look to be rich but still have quietly built properties and amassed wealth slowly over time. The conclusion is that it is not really about how much you earn but about how you manage your finances that will decide how much you will save. Spending behaviour, your lifestyle, tax and insurance planning, investment planning, debt management, etc will together decide how much wealth you will create. Ignoring the fact that you are not going through any financial challenges is an obstacle to achieving investing success.

Over-emphasising certain risks:

Many investors see only one type of risk – the risk of investing in equity asset class. True, an equity asset class does carry some risks. However, there is a risk in virtually everything. The biggest risk is of inflation – the risk of losing the real value of money. If we are too careful with our money for far too long, that is a perfect recipe for wealth destruction. Compare between two child – one who is allowed to play, go out, take risks and make mistakes and one who is overprotected and not allowed to even go out. Which child do you think will be more successful? Similarly, with wealth too, we need to give it some space, diversification and risks in order to grow. We must realise that the traditional saving avenues, bank deposits, etc. do carry some unseen risks, especially in the long term. This may perhaps far out-weigh the visible risks of investing in equities through mutual funds.

Conclusion:

The obstacles to successful investing and enjoying financial well-being has a lot to do with how we think, feel, react and behave with our money. Self-introspection within ourselves will perhaps unravel much more insights and challenges or obstacles than we could ever imagine. Realising and accepting these obstacles would be the first step towards ensuring investing success and also financial well-being in our lives.

What Is an Annual Financial Plan?

An annual financial plan is a way to determine where you are financially at this particular moment. That means taking into consideration all your assets (how much you get paid, what's in your savings and checking accounts, how much is in your retirement fund), as well as your liabilities, including loans, credit cards, and other personal debts. Don't forget to include things like your mortgage or rent, plus any of your utility bills and other monthly expenses. This snapshot should also factor in what your goals are and what you'll need to accomplish in order to get there. This can include things like retirement planning, tax planning, and investment strategies.

Annual Financial Plan Check-Up

Now that you know what an annual financial plan is and how to make one, let’s recap the most important steps in the process. Check off each step that you've considered, even if your response was, "No, I don't want to refinance my mortgage," or "My credit cards are already paid off." The idea is to make sure you've looked at the issue. But you do need to cover every item in our first section so that you have a full financial inventory.

Create Your Personal Financial Inventory

Your personal financial inventory is important because it gives you a snapshot of the health of your bottom line. This annual self-check should include:

• A list of assets, including items like your emergency fund, retirement accounts, other investment and savings accounts, real estate equity, education savings, etc. (any valuable jewelry, such as an engagement ring, belongs here, too).

• A list of debts, including your mortgage, student loans, credit cards, and other loans.

• A calculation of your credit utilization ratio, which is the amount of debt you have versus your total credit limit.

• Your credit report and score.

• A review of the fees you’re paying to a financial advisor if any,and the services he or she provides.

Set Financial Goals

Once you have a personal financial inventory completed, you can move on to setting goals for the remainder of the year, or even for the next 12 months. Your goals will be short-term, mid-term and long-term.

Among your short-term goals might be to:

• Establish a budget.

• Create an emergency fund or increase your emergency fund savings.

• Pay off credit cards.

Your mid-term goals might include:

• Get life insurance and disability income insurance.

• Think about your dreams, such as buying a first home or vacation home, renovating, moving – or saving so that you'll have money to have a family or to send children or grandchildren to college.

Then, review your long-term goals, including:

• Determine how much of a nest egg you’ll need to save for a comfortable retirement.

• Figure out how to increase your retirement savings.

Focus on Family

If you’re married, there are certain things that you and your spouse should be thinking about on the financial front. These are some of the items that may be on your punch list:

• If you have children, determine how much you’ll need to save for future college expenses.

• Choose the right college saving account.

• If you are caring for elderly parents, investigate whether long-term care insurance or life insurance can help.

• Purchase life innnsurace for yourself and your spouse.

• Start to plan how you and your spouse will time your retirement, including your Social Security claiming strategy.

Review Your Investments

It’s important for investors to take stock of where their investments are during the annual financial planning process. This is especially true when the economy undergoes a shift, as is happening now.

• Check your asset allocation. If stocks are taking a dive, for example, you may consider adding real estate investments into yourportfolio mix to offset some of the volatility.

• Then figure out which investments will do the best job of meeting your asset allocation goals – and whether your current investments still fit that profile.

Rebalance Your Portfolio

Periodically rebalance your portfolio ensures that you’re not carrying too much risk or wasting your investment dollars on securities that aren't generating a decent rate of return. It also makes sure that your current portfolio reflects your investment strategy (changes in the market often cause a shift that needs to be corrected to maintain the diversification you originally planned).

• Look at which asset classes you have in your portfolio and where the gaps are. If necessary, refocus your investments to even things out.

• Consider the costs of managing your portfolio .

Plan on Addressing Tax Planning for Investments

While you’re looking over your portfolio and rebalancing, don’t forget to factor in how selling off assets may affect your tax liability. If you’re selling investments at a profit, you’ll be responsible for paying short- or long-term capital gain tax, depending on how long you held the assets.This step can wait until the end of the year. When you get to that point in time, you'll want to consider these strategies:

• Harvest tax losses by replacing losing investment with different ones to offset a potentially higher tax bill.

• Look into whether you should offset capital gains and losses.

• Investigate whether it makes sense to use appreciated securities to make charitable donation or support lower-income family members.

Update Your Financial Emergency Plan

A sizable emergency fund is helpful if you run into a financial rainy day; be sure you have socked away adequate resources. While you’re at it, look at your broader emergency plan as a whole.

• If you don’t have three to six months’ worth of expenses tucked away, building your emergency savings should be a top priority.

• Invest in insurance: Are you covered for a temporary disability, for example?

• Make sure you have a financial and medical power of attorney in place.

Look Ahead to Future Savings

As you move into the fall, think about where else you could be saving money to fully fund your emergency savings and put aside more for the future. Consider whether you should:

• Refinance your mortgage.

• Rethink your car insurance.

• Lower your food bill.

• Utilize Flex spending or health saving accounts.

• Cut the cable TV cord.

• Curb your energy bill.

• Divert your paycheck to savings, by contributing more to retirement accounts or funneling money directly from your paycheck to an emergency savings account.

The Bottom Line

An annual financial plan is an exceptionally valuable tool for your life (and peace of mind) today and for your future. Best-case scenario: you've checked off all the items on this punch list by now. If not, don’t hesitate to pencil in time on your calendar to do so.

The best lessons we can learn is from the experience and lives of successful people. Words of wisdom from those who have achieved great heights of success, starting from nothing, must be heard with full reverence. In this article, we share the life lessons and advice from one of the most respected businessman from Asia – Hong Kong billionaire Li Ka-shing.

Sir Li Ka-shing is a Hong Kong investor, business magnate and philanthropist. Li, aged 91, though retired from active business, still features in the Forbes richest people in the world and was once the richest man in Asia. Li has an incredible rags-to-riches story. From being forced to drop out of school as a child to support his family, he has achieved what few have ever dreamed of. Today, we share his life's lessons and words of wisdom...

Li Ka-Shing money advice: The five sets of funds

Li was a strong believer in making the best use of the resources you have. He proposed the famous five-set of funds method to creating a successful and fuller life. Li suggested that we split your earnings into five sets of funds as given below. Please note that we do not expect everyone to follow the exact proportion for funds allocation in real life. It may change from person to person and situation to situation. What is more important though is that we follow the idea / spirit of the message in our lives...

1] 30% - Living expenses:

The most important things in life have to be entertained. However, what constitutes living expenses? Have we segregated 'needs' from 'wants'? Li suggests that we do a strict budgeting exercise living expenses to the minimum sustainable level. If your budget for living expenses exceeds 30%, you have a red flag. Try considering your expenses, be ruthless in removing unwanted things in life. Li shares that when he was poor, he used to have haircuts only once in three months. Hopefully, you don't have to go to that extreme but some strict action is surely required.

For those at the bottom of the pyramid, even this may seem to be difficult. Understand that if you are not even making such minimum income (matching 30% of living expenses) from the present job or business, it is a red flag in what you are doing. You need to work harder and smarter in life. If you have already spent good time, say at least couple of years, and you still aren't making more than this, then you need to reconsider what you are doing and have only yourself to blame. Li suggests that we move on and find more profitable avenues to put our time and mind. You may also look for other ways of earning income or having multiple streams of income.

2] 25% - Investing:

Li has been a strong advocate of continuous investing. He suggests that we invest in a diversified portfolio of assets. Investing has to be followed like a habit, a discipline. The more you cut on your unnecessary expenses, the more will you be able to save. 25% is the minimum savings required. The rest of the things can later follow. What is also important is that you know that is important in life and spend money on only those things, as we will talk later.

Buying too many clothes, eating our frequently, spending on luxury, etc must be avoided at all costs if you are serious about being wealthy one day. The amount of investments you have will ensure that you never run out of money and your quality of life never goes down drastically. Of course, it goes without saying that you have to spend less.

Li also suggests that we share our dreams and goals with the people around us. It is also okay to spend few times on those you love but it is also important to share to them why you are being thrifty and spending less money. Share with them what you plan to achieve doing so and what your dreams and goals are. One sure that people will then see you differently and appreciate what you trying to do, perhaps even support you.

3] 20% - Networking:

Jim Rohn once said that 'You are the average of the five people you spend the most time with.” The most successful, rich and powerful people are almost always those who are well-connected and have a very good network. Network yourself with the right people, those who have bigger dreams than you, who are more successful than you, are more ambitious than you and more richer than you or the people who have helped you in your career or from who you can learn a lot.

Networking is not cost-free. Even if you have to spend sometimes on such persons, it is all justified. You can spend by forwarding greetings, gifts or fitting the bill when dining out, etc. You may also spend money in joining clubs, associations, etc where such persons can be met and befriended. Spending money for networking is like investing in relationships, ones which teach you, help you, guide you or be of use when required. The valuable lessons and relationships that you earn are the returns which will be useful in life, making you a better person.

4] 15% - Learning:

Learning is a life long activity. Li suggests that you have to set aside some part of your funds to learn something. Use say 5% of your funds to buy books and learning resources. Spend about 10% of funds in attending seminars, conferences and training which will help you to develop and skill yourself and expand your knowledge and understanding. Apart from learning, meeting the right people at these forums is also a part of your investment.

GoodGood learning is that which is not easily forgotten. You have to learn with all seriousness and eternalise the lessons and strategies. You have to materialise your learnings into actions and share them with others. In short, learnings have to be put to action and used, else they will be soon forgotten.

5] 10% - Travelling:

This may be a bit of surprise for many. However, Li believed that one should travel and see the outside world. The big idea here is to rejuvenate yourself. During these 'off'' mode, you can take a break and relax. One cannot always keep performing at the highest levels at all the time. Use this time wisely to recharge yourself, build on your passion and more importantly also think. Travelling perhaps is the most rewarding and popular way to unwind and also offers other advantages. Meeting new people, exploring new worlds can also open up your imagination and can even open up new opportunities. A holiday at least once a year should charge you for the rest of the year to continue following your dreams with even more passion.

It is not mandatory that you travel or always travel far and wide. You may even choose to pursue any other passion or hobby that you may have. Travelling also need not be expensive. You can stay in budget hotels, plan your holidays much in advance, in off seasons or to places which are not hot on the tourist circuits.

Conclusion:

Continuous self-improvement is an important ingredient for one's success. You have to always seek ways to grow yourself. If you are stuck and not growing as a person, in Li's words, 'you should be ashamed of yourself'. In today's dramatically changing world, every job and every business is subject to disruption by technology. You have to invest in yourself if you wish to be successful. Once you are rich and successful, you have to stay at home more than yourself and keep a low profile i.e., don't show off and don't let other people make use of you. Just keep spending money on yourself as many others are doing just the opposite.

History has shown us that equities have been the most rewarding investment, asset class over long-term horizons. It has potentially generated tremendous wealth for investors. As more and more investors realise the potential and need for equities in their portfolio, they are faced with the choice of either investing directly into equities or investing through equity mutual funds. Which is better? What should I do? This article answers that question.

What do you need for direct stock investment?

1. Time to research stocks: Studying the share markets is a full-time activity and requires a lot of time and energy on part of the investor. You would also need to analyse economic numbers and macro-economic factors like government policy changes, global impact, currency, etc. You should probably leave your day time job /business to do that.
2. Market Expertise: One needs adequate skills and expertise in managing investments. Since too much information is readily available, true skill is to know what is important and to analyse the same and assess the impact on the stock prices. This is not which you can learn easily but comes only with experience, involvement and intelligence.
3. Research affordability: There are a cost and time factor involved in research and study. The time is something which carries huge costs but is unfortunately not often measures by small investors. Such costs are justified if your investment capital is small or if you are a small-time investor.
4. Unbiased and emotional control: It is a fact that a very large majority of equity investors haven't created much wealth from stock investing. Faulty investor behaviour is the culprit when it comes to less than optimum returns from markets even though the markets have performed very well in long-term. Can you claim to be unbiased to your stocks, remain unaffected from daily news and stock movement and not be carried away?

What you will not get with Mutual Funds investments?

1. Excitement and thrill (or worry) of stock movement: Let's admit it. Direct stock investment is exciting and thrilling. It is like T20 and if you wish to be always preoccupied with markets, like the excitement of uncertainty, direct stock investments may be your preference. Mutual fund investment would be like a test-match, it is boring and not exciting enough for you.
2. Full control over investments/stock selection: In mutual funds, there is someone else who is taking the stock investment decisions within the ambit of the scheme objective. You have no control if you want HDFC bank instead of a Yes Bank in your portfolio.
3. Ownership rights: With direct stock investing you become a part-owner of the company and get ownership rights. In a mutual fund, you do not get that sense of ownership since underlying stocks are 'indirectly' held by investors through the fund house.

But what you will get with mutual funds investments?

1. Professional management: In mutual funds, the investor leaves this task to the fund managers who are professionals in their field and manage the investment on behalf of the investors.
2. Portfolio diversification: With mutual funds, you have very good diversification. Even if a stock goes bust, you are not much affected. As opposed to this, if you had been invested in that stock directly, you would have likely suffered a huge loss.
3. Diversification at affordable cost: With just a few hundred rupees, one can invest in over 20-30 companies. This is because MF units have are priced at affordable NAVs derived from the entire portfolio. You may be owning highly priced stocks which may not be possible In direct equity investing, Also, such level diversification will not be easy to achieve in direct investments with low capital.
4. Economies of scale: Mutual funds enjoy great economies of scale for their entire research, fund management and administration costs. These are passed on the investors as the fund size or AUM grows in the form of lower expense ratios. Expense ratios are the only cost which the investors pay and it is clearly known in advance.
5. Investment management tools: Mutual funds offer many tools like SIP, growing SIP, STP, SWP, dividend payout, dividend reinvestments, insta cash, etc which can be smartly used by investors to manage their portfolio and cash-flows. Such multiple tools are not available at the disposal of direct stock investors.
6. Tax benefit: Of course, equity mutual funds enjoy similar tax treatment as direct stocks. However, equity-linked savings schemes or ELSS gets counted in your 80C investments. This benefit is not available in direct stocks.
7. Budget-friendly: For most of us, we are concerned with the investible surplus we have. With mutual funds, you can however relax and start saving with as little as Rs.500. There is no upper limit though.
8. Ready portfolios as per strategy: There is a huge choice of funds which follow different objectives and strategies in their preferred universe of stocks. There are ready portfolios like large-cap /mid-cap /blend /value /contra /sectoral or thematic fund, etc to suit one's risk appetite and strategy.
9. Choices for asset allocation: Moving beyond equity funds, there are funds offering every possible combination of equity and debt assets. Thus, even while you may be investing in a single fund, you may have a matching asset-allocation to your risk appetite. This is something you will have to manage separately in your portfolio.

To be fair, both mutual funds and direct equity have their pros and cons. What is more important is to know what you are looking for, what you are capable of and how much time and efforts you can put to it? Obviously, most of us are preoccupied in our lives, job, business, etc to devote quality time regularly only to investments, even assuming you have the necessary skills & knowledge. Investment in stocks is thus recommended only to those investors who not only are great researchers having expertise in markets but also willing to go put in the efforts. For the majority of us, mutual funds offer a much better trade-off where you can hire such proven experts in the industry for a small fee. When we look at the benefits offered, obviously we can safely say that equity mutual funds are the ideal vehicles for investing in stocks.