FINANCIAL PLANNING: Any time is good for savings and investments

The article is largely about two kinds of actions - Acting based on biases and inertia for action created out of the excessive analysis. The latter leads to paralysis of action or delay in action, becoming a case of too little, too late.

Acting based on biases: One of the most critical aspects of financial planning is often centred around a property purchase - whether to buy one, how much to buy one for, when and where to buy it, the loan amount, the type of property to be bought, and so on. This is because buying a piece of land or residential or commercial property is usually a low returns yielding, indivisible investment that involves a huge amount of money. It often derails the existing asset allocation as the outstanding loan component sucks the inflows of the next two decades, leaving limited resources for other financial goals. Moreover, it is tough to liquidate and opaque in pricing.

I have had clients who have consulted me after buying an expensive house. By their own admission, they regretted not consulting me before making that decision. Most of these purchase decisions, taken five to six years ago, were based on historical data of appreciation in the property over seven to eight years. High recency bias led them to extrapolate the past returns, thus basing their view on a best-case scenario. This situation can be summed up in a profound quote I read somewhere that said, "Hope is not a strategy".

Inertia for action: I often come across people who think that the right time to initiate engagement with a financial planner is when they have enough money (in their words, a decent amount) to invest. It may end up proving a mistake of judgment as time progresses. Rome wasn't built in a day and drops make an ocean. Just as there is no short-cut to success, there's no bullet train to prosperity. Wealth is created over long periods of time through perseverance (long-term investments), discipline and diligence (investing through crests and troughs) and budgeting of expenses (giving precedence to long term, high-priority goals over unnecessary expenses on instant gratification). This leads us to place our faith in the following quote by Marsha Sinetar, "A simple fact that is hard to learn is that the time to save money is when you have some", and a witty one by Shaquille O'Neal, "There are seven days in a week and someday isn't one of them".

While acting based solely on past data, it is pertinent to note that we invest for tomorrow. What led to the terrific performance of an asset class over certain years might have been fundamentals-driven and may not be sustainable or replicable. Just as we do not drive a car by looking at the rear-view mirror, past performance may or may not be repeated in the future years.

Regarding inertia for action, we have to acknowledge and appreciate that our investing environment is filled with uncertainty. Opportunities have to be utilised by exercising action even when there is insufficient data available. For savings/investments any time is a good time. The critical question to address while investing any amount is asset allocation, which is largely driven by future goals and their priority. While commenting on human behaviour towards acting/investing in markets (equity) which deliver asymmetrical returns, Peter Lynch says, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves." Age-old wisdom captures the same mood by saying "A stitch in time saves nine".

The writer is a certified financial planner, founder partner of Srujan Financial Advisers LLP and author of 'Why greed is great'.