The single most investing challenge faced by investors today is “free-advise”. Here is a look at the issues, consequences and impact caused to you by such free advise.
- Wealth erosion occurs when you are are looking for an investment product but sold an insurance policy.
- A product-mismatch occurs when say you are looking to open a bank locker but your bank pushes you to sign up for a 20 year premium paying pension product.
- A risk-mismatch occurs when you look to enhance your returns in safe products, but you are sold an equity savings fund – you are pushed to buy a high risk product on the pretext of returns.
- An asset allocation mismatch occurs when someone prods you to buy your third property or gold without understanding your allocation is low to liquid assets.
So, at the end of 10-15 years, you hold many investments, some with positive returns, some negative and others with no idea on returns. As an investor, you find it nearly impossible to comprehend exactly how much return all of these investments collectively gave you – why?
Because the above approach is based on free advise whereby a product is pushed to you without trying to understand your actual needs, goals, risk ability & return expectations. Items (1) to (6) belongs to product-based-investing & (7)&(8) are returns-based-investing. These approaches often leave investors’ with a basket load of products that are not aligned to the timeline in which they actually need the “cash” to spend for their liabilities (like child’s education or retirement).
A goal-based investing approach gives you undeterred focus on your big picture and help you wisely invest towards fulfilling those goals at timeline(s) they become due.