How often have you taken an aspirin when you had a headache? Often? Yes, many of us are accustomed to take generics or common medicine for aliments that do not seem to be threating. When we experience mild headaches or common cold and we all gobble up a Vicks action 500 or Coldarin or whatever our friend has advised. The remedy worked for our friend and most likely it would work for us. However, when the ailment does not cure, we make a rush to the nearest doctor. But somehow when it comes to financial investment decisions, we often make the mistake of continuing to live a fantasy world despite financial losses. We tend to believe what worked for a friend would work for us.
Let’s take the example of two individuals – A and B, both aged 33. Both are the only child to their parents. Both A and B work in an Information Technology company and earn the same amount of money via salary. Both are married and have a kid. So as per the any financial template, it could be said that A&B would need to invest in 50% equity and 25% debt fund and 25% PPF or whatever you find on the internet. What people tend to forget is that each Individual is different and financial advice has to be tailored.
Let’s delve deeper – A is the son of a central government employee. B is the son of private sector employee. Clearly, A has an edge that his parents would be covered by central government health schemes and B should check out private health insurance schemes for his parents. It is very important to consider parents and the dependency of parents on a person before suggesting anything to anyone.
Again, A’s wife is working and B’s wife is not. Big difference – B needs to be more conservative? Not over. B’s parents because of being in private sector had earned more money earlier in their career and hence had bought land at a cheaper rate in the 80s. Wow, the whole equation seemed to have changed now. Well, health insurance is still a need for B! But what about risk aversion?
B had been investing in SIP since the age of 25, while A had never had any investment portfolio. Oh! Now, it looks like B is perhaps the better candidate for taking more ‘risk’ and hence qualifies under the ‘higher equity’ pie chart piece. Oh! bonus life situation, B had been to USA for a year and earned in US dollars whereas A sat in Bangalore.
We can go deeper and check all the life situations out, but the key message is that financial decisions need to assess on case to case basis. In this case, A & B may be the best of buddies and B may even advise A to start an SIP, which may be a good help. Yet, not everything can be blindly copied just because a friend did something and profit out of the investment.
The reason why Finvestor.in has a risk assessment before giving advice is simple – it follows regulations and the need for that regulation is to figure out what is the financial health of the individual.
The Author, Krishna Rath, is the founder of Finvestor.in, a place for financial investors to get their answers on what and where to invest. Krishna is an MBA from IIM, ALMI from LOMA and is a SEBI Registered Investment Advisor. He was worked with several financial firms in building critical information systems.