Be a true friend for today!

       “A Best friend knows how crazy you are and still chose to be seen in public with you.”

                                                                                                         -     Anonymous

Thank God it’s Friday! Any Friday morning unlike the five previous ones, brings with it the hope of much needed break from your monotonous and hectic work life schedule. The evenings are usually planned ahead of time; destinations pre-decided for fun unlimited.

The party begins at dusk not concluding before the dawn. In any such party or get together there is always some friend of ours who is overwhelmed and gets drunk more than usual. He has swigged down six and now can’t even walk straight.

Would you let your friend drive when he can hardly walk? The answer would be definitely a ‘No’.  You might drive him home safely or may call his brother to take him home or might even call a cabbie to ensure he is back home safe.

My question is why would you do that? The answer is simple-that you care. You care about his well-being, about his two little kids and his wife, as their future depends on your friend’s well-being.

In case of any fatality, the worse comes much after the accident. The wife finds it difficult to make the ends meet. The kids bear the brunt of trimmed cash flow. Most of all, their schooling is put in jeopardy. All those sweet-and-sour memories of birthdays, vacations, holidays, smallest of small occasions of celebrations take a big compromise.  The question is for what? Does our family, near-and-dear one really deserve this?

Your friend is indeed very blessed to have a buddy like you. You just saved him and his family from adversities of life. Your one responsible gesture saved them all from the imminent miseries and agonies which your friend was too drunk to realize.

But does your care-and-concern end here? There might be so many situations when you might not be there. The possibilities of a casualty happening are endless. You may not be there to protect him on every occasion. But you can take a step ahead to ensure that the odds of his family getting into despondency are reduced by a large extent.

Engage in a conversation with your friend about financial risk management. Put through his ears; make him aware of the financial needs of his family and fundamentals risks that should be covered during his lifetime.

a.      Cover the risk of loss of life:

Agreed, no one can stand in lieu of you after your fate. But, fact remains that your dearest ones have to move on. Undoubtedly, emotional void endures; nevertheless, you can ensure financial independence of your dependents and make them self-dependent so that they able to achieve their goals and attain happiness in life.  Simple ABCD by you, will aid him and his family resolve the complexities of life.

Ask him to Acknowledge his needs, requirements and liabilities- Browse through the internet- Chose a reputed life insurance company with a good claim ratio and select a cover 18x of annual package- Dish out the credit card and close the deal!

b.     Cover the risk on health:

Ask him to know the health insurance plans provided to you by his company. Know means, understand it! Increase the cover to an optimum sum assured of at least 15 lakhs. Don’t forget a family floater!

For complete protection, a must have is a critical illness plan, which pays the claim in case any critical illness is identified. Health plan pay the cost of treatment, while critical illness will reimburse any loss of income and any liabilities during the treatment.

Your protection is utmost, to shield your family from any future misfortune. Expense for today is an investment for tomorrow. Protection for their future is among the best contribution you can make your family well-being.

  

Yet, facts remain enlivened…

-        Statistically more than 80% of the people are underinsured for their life and health.

-        More than 80% people do not have a critical care plan; worse is they even don’t know about it.

-        90% of the people combine insurance with investment and get stuck with ULIPs or Money Back Policies in hope to garner high returns.

A small and simple message by you, can guide your friend towards a very important step- Financial security of his family. Honest opinion and a fine gesture, as trivial as a small discussion can make him re-plan his priorities and motivate him to act promptly to make a decision vis-à-vis ‘I know. I have to do. Was thinking of doing today; forget to do, but has kept as a first concern’ attitude.

Investment Pattern Behavior Analysis

The concept of Homo Economicus considers us as rational, aware and self interested persons.

And under such assumptions we attempt to maximize the utility as a consumer and economic profit as a producer.

In the practical world none of us behaves even close to the assumptions of such rationality, especially when it comes to our investment pattern behavior. It is interesting to observe that our understanding of the value of money changes as per our environment or the stimulus.

I would like to share two scenarios where you are a consumer in one and investor in the second. Be honest in your responses before reading the answers to evaluate your investment pattern behavior.

A.    With a limited shopping budget and a credit card in the wallet:

1.      If there is a discount of 10% on a pair of shoes worth Rs 5000 shoe and 25% on a pair of shoes worth Rs 8000 which one will you chose?

2.      You want to buy a shirt but there is only 10% discount on one shirt but 20% on two shirts and 30% on three shirts. Which offer will you take?

If, in any of the above cases your response is the second or third option, then you must realize that you over-stretched your budget. Buying at a discount is perceived a sensible decision but if we calculate the amount of money spent then we will find that it was higher than what we actually had. And having a credit card led us to behave under House Money Effect.

B.     In the case of your investments:

You bought a share of company called Imperial at Rs 500 one year ago and the share price is now at Rs 1000. Similarly, you bought a share of company, Regalia at Rs 2000 one year ago and the share price is now at Rs 1000. Now, if you immediately need Rs 1000, which share would you sell?

Do you want to keep the share of company Regalia in the hope of covering the losses? If yes, then you have just exhibited a bias of Loss Aversion.

Creation of wealth is fundamentally a function of your emotional responses. Your natural psychological preference determines your investment pattern. In short, the way you do something is the way you do everything! You need to watch out your behavioral response to protect and grow your wealth.

In case you are not satisfied with the amount of money you have accumulated by now. Or, you are not happy with the returns generated by your portfolio. Or, if you see any danger of missing or delaying of your long term goals like buying a house, then you must reflect upon the following questions:

1.      How aware are you of your investment decisions?

2.      How shielded are your investments from your emotional responses?

3.      How would your goals suffer due to your emotional bias?

If you are buying when the market is high and selling when it is going down then you are doing nothing more than chasing a high return story. An ideal solution is to identify the errors in judgment and to stop repeating them. Get aware of your risk profile and align your asset allocation to it. In no case should you allow your advisor to change your asset allocation.

Discipline in investing allows us the greatest of opportunities to create wealth. I believe the S&P BSE Sensex will touch one lakh points someday. Do you? And if you do, then are you invested enough to make the most of it?