Portfolio : A collection of investments owned by the same individual or organization.
Will : legal declaration of how a person wish his/her possession to be disposed after their death
Fund : An amount of money saved or collected for a particular purpose
Return : Profit or loss derived from an investment
Investor : An investor is any party that makes an investment.
A set of assets which an investor holds. This may contain equities, mutual funds, insurance and other cash equivalents.
“We generate 2.5 quintillion bytes of data every day” – Forbes Report 2018.
Some of them can be the solution for your financial hurdles.
However, seeing the amount of data generated, finding the right financial information will be like finding a needle in the haystack.
Imagine, you’re watching TV and the news says your stock value will be falling for several consequent weeks because of a merger. What would you do? Would you act upon it? Would you switch or stop your investments till it rises again?
One of the common mistakes among investors is; they learn the art of how to process information too late. In this article, you will learn how to identify financial information, so that you can build your portfolio the way you want.
You can identify the financial information in its Usefulness, Validity, and Priority as,
- 1. Evergreen Useful Information
2. Temporarily Useful Information
3. Useful But Masked
4. Useless But Entertaining
5. Instant Action Prompting
1. Evergreen Useful Information
Useful and evergreen information is timeless information.
It includes basic facts and fundamental rules of investments and personal finance.
Budgeting, for example, is a fundamental thing to manage your personal finance efficiently. It is useful, fundamental and this fact is not going to change ever.
Implementing the evergreen information assures an investor that he builds the discipline needed for his financial goals. And the best thing about this evergreen information is that they do not require investors to learn any advanced concepts.
Financial information such as this is easy to find and follow. You can see below some of the examples of evergreen useful information.
- Budgeting is the beginning of financial control.
- Have a comprehensive financial plan.
- Time is an important investment tool.
- Prioritize your financial goals
- Equity mutual funds for long term investments.
- Equity funds risk even the principal investment.
- Portfolio diversification minimizes investment risks.
- It is useless to micromanage your investments.
- Not all investment information is equally important.
Certified Financial Planners are a good authentic source of Useful Evergreen Information.
How Can Evergreen Financial Information Help You?
Though finding timeless financial information is relatively easy, employing them to alter our behaviour can be tricky without guidance.
Start small, build big!
For starters, you can always start with the budgeting. It lets us track the cash inflow and outflow through every cycle. You can also keep a budget spreadsheet on the cloud to track your expenses and savings rate in real-time.
In a month, you will get accustomed and make this style of tracking a habit instead of a mere task to complete. Moreover, physically seeing your savings as numbers and percentage triggers a natural response to get better at it through a sense of control overspending.
You can take it one step further by listing down your financial goals and prioritizing them. Short term financial goals tend to change every couple of months. To keep your short term financial goals in check, review your financial goals every month.
Take another step for risk assessment and asset allocation before choosing where to invest. It is a gradual process which should be done one step at a time.
Evergreen financial information will be slow, but progressive and can guide along the way.
2. Temporarily Useful Information
Temporarily useful information could be anything from Annual financial budget or Change of interest rate in loans or Changes in SEBI and RBI guidelines, etc.
You can use this information to course-correct your financial plan in the desired path.
But you must ask a mandatory question of,
“How long will this information be useful for me?”
For example, for the financial year 2019-20, the due date for ITR filing was July 31. It became useless when the finance ministry extended it to August 31. After August 31, this information is useless too.
What should an investor do?
Temporary useful information makes up the conscious knowledge base of an investor. Investors must gather and update this knowledge regularly. The better way to do so is by dedicating some time for it in your daily activities. Spending 15 minutes a day is not much, but in a month it’ll be effective.
It is vital in making financial decisions and directing your financial plan in the right direction.
What can go wrong for an investor?
Before we get into the details, have you ever wondered why game shows have countdown timers?
Just by saying you have limited time, hastiness is planted in a mind. Since the temporarily useful financial information comes with a countdown timer, they create a sense of urgency in the mind of an investor.
Urgency will force you into making hasty financial decisions which you would not do otherwise.
For example, you have a financial plan and investing based on its asset allocation plan. But then you see an ad “NCD with assured high returns: issue closes in 3 days! Hurry!”
It creates exclusiveness while using it to push you to invest in the same.
But no investment opportunity is “once in a lifetime opportunity”. With the right financial planning, you can make a fortune. Be conscious about the time urgency of your temporarily useful information, you can run a long way.
3. Useful But Masked Information
Majority of the information that makes you feel smarter than other investors come under this category.
Information on the Internet or TV channels or any media, most of the times, is presented to attract the audience. On the other hand, marketing executives have a motive to keep you hooked and sell their products or services to you.
In both of these cases when the information is presented, it is done with the best interest of themselves and not the investor. What they present you is the truth but not all of them. Interestingly their strategy works every single time.
For example, if an agent is explaining to you about a mutual fund, he could be explaining you its potential to deliver higher returns because of portfolio concentration. Along with that, he would also say this fund has standard mutual fund risks like every other fund.
However, the ‘lie by omission’ here would be the omission of fund volatility. If a mutual fund has a concentrated portfolio, along with the return potential it also increases the risk probability to a greater margin. And any agent trying to sign you up, whether directly or in the form of an internet post, must explain it to you upfront.
Useful but masked information is like Trojan horse that gets into your mind as a useful one, but instead they destroy your investment plans. As an investor, only if you have a holistic view of your every financial decision you can minimize slip-ups.
Consider This Scenario:
You have invested long term in equity funds as they are the most suitable for long term investments. You did the research, you did proper asset allocation as per your risk tolerance and you are aware of the risks involved.
But the primetime ‘flash news’ and the evening news debate over drop in stock market points never fail to make you worry about your investments.
It is a fact that the market has risks and will face downtimes. But no debate is ever going to argue about how it wouldn’t affect an investor in long-term.
The idea is to provoke your thoughts and keep you engaged. However, if you take a step back and see the bigger picture, you will be able to see the fact.
4. Useless And Entertaining
Media is filled with useless and entertaining information.
It could be a “1 Step Hack to Predict Stock Market” guide or unrealistic market pattern prediction theories. The intriguing “What if” market analysis, sometimes make experienced investors waste time on such information.
For example, you might stumble upon an article claiming that SIP on 12th of every month will give you higher returns. But do they?
If you take years of data and analyze yourself, there will some date for now but some other date for tomorrow.
How Can Useless Financial Information Affect Investor?
Useful financial information clears the doubts of an investor and helps to decide with no difficulties. See Useful Evergreen Financial Information, for example, they are well-defined, clear and help you progress financially.
But superficial theories such as this pick your curiosity to lure you and push you down into the never-ending rabbit hole. In the end, you will only lose your time and more confused.
Sometimes it goes to the extent of getting obsessed with such things that it starts affecting the financial decision-making process.
The father of American Psychology, William James, said—
As odd as it may sound, overlooking is definitely not a bad idea when it comes to useless information.
For example, let’s say your fund has increased the expense ratio by 0.5%. Any immediate reaction would be to start calculating how it is going to affect your investment return rate.
Should you overlook this information?
If you decide to make any decision—like switching funds—without a professional’s advice, you may be destroying your portfolio without being aware of it. If you have made your financial plan with the assistance of a financial planner, you need not worry about any of this useless persuasive information.
You must overlook this information before it draws you into selective rationalization.
5. Action Prompting Information
Financial information that prompt action is very rare but unavoidable.
For example, Imagine, you have a housing loan with a term of 20 years. You are paying the EMI @ 9.05% interest for almost 3 years.
Now if your lender increases the interest rate by 0.75%, it would increase the effective interest rate to 9.80%. This change in formation will prompt an action to keep your portfolio under control.
Some of the possible actions that can be taken are,
i) Increase the loan term:
If the interest rate increases, obviously the total amount payable will also increase. It will result in extending your loan term for few more years than before.
Effects: Extension of your loan term means delaying of your other financial goals. Worst case scenario: it could also affect your retirement plan.
ii) Increase your EMI:
On the other hand, if your finances allow, you can increase your EMI amount to complete the payment of outstanding loan amount. In this way, the loan term will be constant.
Effects: However, if you choose this action, you might need to hold or minimize your savings rate until the loan payment is complete.
To compensate for this savings slowdown, you will be tempted to go for higher risk investments for higher returns. Any investment beyond your assessed risk tolerance level would require changes to your financial plan reducing the success rate.
iii) You can do a Home Loan Balance Transfer:
A home loan balance transfer can sometimes turn out to be the right option. With this option, you can transfer your loan to a different bank or financial institution that offers a lesser interest rate for your loan.
Although, finding a bank that offers the original 9.05% interest rate is not always possible, let alone an even lesser interest rate.
Effects: If you choose to balance transfer your loan you will also need to pay a transfer charge. It is usually a small percentile of the loan amount.
|Particulars||Extend Loan Term||Increase EMI||Balance Transfer|
|Principal||₹30 lakh||₹30 lakh||₹30 lakh|
|Term||20 years||20 years||20 years|
|New Interest Rate||9.80%||9.80%||9.80%|
|Possible Actions||20+4 years||₹27,000+₹1,600/Month||Transfer to 9.40% + 1% Transfer Charge|
What Action Should You Take?
As seen in the above example, in such situations you will have different options to choose from.
But you might be in a dilemma to take action. If you find yourself there, do the following.
- List all the possible actions
- Compare the actions with one another.
- List their merits and demerits.
- Eliminate the ones that have most demerits.
If you have a financial plan you can check whether the action aligns with your financial plan or not.
Since financial plans are created with a holistic perspective, the chosen action will have minimal effect on your personal finance. Situations such as this show that financial planning a necessary one for a successful financial life.
With the different financial information available, you should be selective on how you make use of them.
One is straight forward facts while the other comes with a validity period. One speaks partial truth, other demands immediate hit or miss action.
Without any control mechanism, financial information could cause information overdrive resulting in analysis paralysis. Since Certified Financial Planners deal with all kinds of financial information every day, they can be your tool to process financial information. Professionalism coupled with experience could be your better source of financial information yet.
Would you like to give it a trial run by signing up for a free consultation before an analysis paralysis gets to you?