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Personal finance: Liberated... yet rooted

The Telegraph draws up a list of duties for an investor in search of financial freedom
It does not matter whether you are keen on a fixed income or whether you are enticed by stocks
It does not matter whether you are keen on a fixed income or whether you are enticed by stocks
Sourced by The Telegraph

Nilanjan Dey   |   Published 15.08.22, 12:01 AM

Liberation spurs a responsibility like no other. For investors, such responsibility comes in the shape of a roster of duties. There are tasks to perform, targets to reach and tests to undertake. This Monday, August 15, the list is long and elaborate. Not particularly because we are celebrating our 75th year of independence but because the market now demands the kind of commitment it has seldom needed in the past.

It does not matter whether you are keen on a fixed income or whether you are enticed by stocks. Whatever your position is, the fact that you have invested in securities in some form or other thrusts upon you a terrific responsibility. In the age of inflation, in the context of rising expenses, in the backdrop marked by regulatory supervision, you have a lot of duties to perform. These will help you become a better investor – in the process, you can energise your portfolio, achieve investment objectives and book superior performance.

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Let me divide this Independence Day narrative into three key sections. Tasks, targets and tests. The alliterative imagery is indeed evocative if you consider these separately at first, and cohesively later. Tasks, of course, refer to the homework you need to do before investing. Targets are what you set for yourself at the time of choosing investment products. And tests are the processes that your portfolio should go through during the entire process.

Tasks

If you wish to be truly independent make sure you have assessed your risk profile correctly. The margin of tolerance you have for risks will determine the way you construct your portfolio and the manner in which you choose its constituents. The risk-averse individual will stay away from assets such as equity and commodity to the extent possible. Instead, such an investor may want guaranteed income or at least income that is visible and predictable at the end of the day.

The next set of duties pertains to the determination of investment objectives. The classical financial plan will require the investor to demarcate short-term goals from long-term ones. This is, clearly, a function of the time that the individual has at his disposal and the goals he has on his radar. The assessment of objectives is critical – because the selection of products will finally depend on it.

Targets

Targets may be seen as the performance numbers that the investor has in mind. A goal that must be achieved by, say, 2025, has to be backed by a suitable strategy. The latter must be very different from the one that should be employed to reach a target in 2040. It is unwise — indeed, a blunder — to use a short-term strategy to attain a long-term goal. As the investor advances in terms of age, as his life stage changes, targets will be revised too. The smart investor will make sure that newer plans are devised in order to meet fresh targets. The latter may necessitate higher costs and expenses, which collectively will impact the investor’s returns. Thus, the individual should be cautious when it comes to relatively expensive products.

Tests

Tests, which constitute the last phase of our discussion, are the processes through which a portfolio should be made to run. Some of the more demanding processes relate to rebalancing and profit taking. These will ultimately help the investor to optimise performance. A portfolio may, over a period of time, collect deadwood – some parts of it may turn counterproductive. These must be discarded in order to support the overall structure. Similarly, some parts of the same may become obsolete; these must be removed to make room for new holdings. A few stocks that have lost their edge, a couple of funds that are forever underperforming or an insurance policy or two that are redundant. These must be identified and a cleansing exercise must follow. It will ultimately create efficiencies.

Financial freedom

The market will turn particularly demanding in the days to come. There will be great pressure on performance across timelines and asset classes. Expenses may well increase, and regulations are bound to be tougher than ever before. Investors must remain familiar with modern compliance requirements. Even the average investor will be spoilt for choice – there will be scores of competing products to choose from, while newer technology-enabled intermediaries will emerge rapidly.

Keeping these changes in view, the contemporary investor must aim at complete financial freedom. Affirmative action will become possible only if he finds himself liberated from shackles. The latter can, in the modern world, come in the form of loans and various interest payment obligations. It is prudent to leverage – borrow on the strength of an asset to invest in another – only when loan commitments are leashed.

An asset that needs high maintenance payouts at regular intervals is perhaps not the most perfect possession. And an asset that appears to be a perpetual laggard should be dealt with ruthlessly. Financial freedom will also demand elevated awareness. A new regulation, for instance, should be appreciated if it energises one’s portfolio.

A new product variant should be assessed at the earliest; it may just be considered appropriate enough to replace an existing constituent. A technology platform should be examined if it creates room for better assessment or communication. These trends are bound to emerge in one form or another. It is only a matter of time.

The 75th year of Independence marks a great opportunity for investors, old and new. The older ones must introspect and improvise, while the newer breed must formulate and implement. At the end of the day, it will all be measured in terms of liberation, which, as I told you right at the very beginning, spurs a responsibility like no other.



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