The principle of civilisation is to move on. Shrug off excesses from time to time and move ahead. History is witness to this phenomenon. I call this long term historical inertia. The broad objective here is prosperity and the end of one era or phase signifies the beginning of another. We however realise this only when it has taken proper shape and when it is tangible so to say.
In the interim what we have is short term historical inertia, something that all of us can see, feel and live. It is tangible and thus easier to understand. And that is why we tend to feel all the time that what has just happened will continue to happen for a very long time. This is seldom the truth. Why this is so is a mystery and will probably remain so. When we have bad news all around us we think and force ourselves to believe that it is going to get just worse. And before we can fully digest the situation the markets as we know them take off for another rally. When it seems that the whole world is prospering we expect the good times to last forever. Just then things start to turn around so sharply that we do not even have time to react. Excesses are created in both instances. Over time they are shrugged off and a new cycle begins. What options then do we consider? As always it is either action or inaction. A good way to understand rationale behind any action or inaction would be; to be guided by a Financial Plan. And do not forget planning is about strategy and not allocation.
Remedy for long term inertia
The unfolding of events over long periods of time such as 5-7 years call for serious action. A lot changes during such periods be it industries, businesses and even your own lifestyle. Let us for example look at the history of the last 20 odd years of the Indian stock market. We have had some serious action points in and around 1992, 1996, 2000, 2004 and 2008. I like to look at this as waves and because of the principle of civilisation each wave was larger and mightier than the previous one. I believe that such phenomenon would continue to happen like every other eternal optimist. That to me is long term historical inertia because it seems to be intertwined with progress and prosperity come what may.
Remedy for short term inertia
See things from a distance say an airplane and the city would look beautiful. Come out of the airport and the perspective changes. But the beauty has not disappeared just that you cannot see it with a myopic view. There are times in a market’s cycle where the best thing to do is to do nothing. Sometimes not to do something is also a very important and a relevant decision. Action may not be needed all the time. Just because things do not look nice or so it seems it is not time to shift gears based on “noises” that we hear. Neither desperation nor dogmatic beliefs pay.
Power of Authentic Financial Planning
Planning provides solutions to manage two vital aspects of a family’s financial future viz; uncertainty and possibility;
I. Minimises uncertainty by building cushions – It is common logic that if we overestimate outflows and underestimate inflows we would have automatic cushions. There would never be grief or any hard-landings. Some examples;
a. While planning home loan repayment (for 50 lakh loan of 20 years tenure) if we estimate interest rate to be just 0.5 per cent higher than actual payable; then in 5 years we would be able to make a timed or planned prepayment such that we will save about 10 lakh in interest cost and be in a position to finish the loan earlier as well.
b. While planning retirement 20 years away for a Rs 50,000 pm current lifestyle; by altering the possible rate of return from 9 per cent to 8 per cent we create a huge cushion of about 50 lacs.
II. Maximises possibilities by optimising risk – Conducting risk profiling for a client while doing a Financial Plan is like a doctor not having his own judgement and asking the patient on the potency of dose he would prefer or like a lawyer asking his client under how many sections would the client like to file the case. Planner must exercise his own judgement and advice on the risk quotient that is appropriate based on relevant factors for the family in question. How to achieve the more is what the planner tries to answer. Here is an example
Assume that you are investing Rs 25,000 per month for some goal 15 years away and it is expected that at 12 per cent rate of return you would be able to accumulate about Rs 1.25 crore. By increasing estimate of equity returns from say 12 per cent to 14 per cent which is also a fair rate we create a possibility of either achieving Rs 25 lakh more than budgeted or we can afford to invest about 4k lesser and reach the same goal amount if we are faced with say increased expenses due to inflationary scenario.
Such is the power of planning; that not only does it helps you take informed decision about financial management per se but also how to eliminate the “noise” factor that is caused by the short term inertia.