investment decisions: Do you know why you invest the way you do? Check out my WHYs

In his best-selling book Start with Why, Simon Sinek writes about how people won’t truly buy a product, service, movement, or idea until they understand the WHY behind it. This got me thinking about investing, and if I truly understood and am in tune with the WHY behind it.

Do all of us truly think deeply about the purpose behind the investment decisions that we make at any time? I decided to test this out and tried to put down the WHYs behind my investment decisions and my definition of asset classes.

While writing this, some of these WHYs took me by surprise and some made me really think before fully defining them. I hope it makes you think, re-assess or become more aware of different aspects of investing and personal finance.

• Why do I go for Financial Planning? To achieve goals like retirement, children’s education, buying a car, a vacation and meet other financial goals with least amount of stress.
• Why equity? It’s a simple concept; owners earn more than employees.
• Why diversification? Not all owners will succeed.
• Why mutual funds? Most investors do not have the time, knowledge, energy, or liking towards various asset classes and for investing.
• Why active funds? Because mutual fund managers with their experience, knowledge and strong teams have the potential to beat the market.
• Why passive funds? Because despite charging fees in actively managed mutual funds, there is no guarantee that mutual fund managers will be able to beat the market.
• Why largecap stocks and funds? They are relatively stable companies, experienced management, can better manage economic downturns, have better access to capital and human resources. (Relative to midcaps & smallcaps)
• Why Midcaps & Smallcaps? They offer better upside potentials, and a few of them can be future largecaps.
• Why flexi-cap funds? This category has all three largecaps, midcaps, and smallcaps in one portfolio.
• Why international stocks? Because, Indian stock market is less than 3 per cent of the entire world stock market.
• Why patience? Because from the peak of 1992 to 2003 the equity market gave no return for 11 years.
• Why long term? Maths. Because in the magic formula of compounding, time is exponential.
• Why fixed income? In 2008, when the equity market corrected more than 50 per cent, the fixed income assets acted as shock absorber.
• Why a core fixed income portfolio of ‘AAA’ securities? Because the credit risk is low and the portfolio is well diversified with high quality borrowers.
• Why money market funds? To manage short-term needs.
• Why gold? When people lose faith in fiat currency, the yellow metal does well.
• Why real estate? It gives inflation-beating returns on a long-term basis along with added benefit of safety and security.
• Why emergency fund? Because the world is uncertain.
• Why life insurance? Because death is certain, but the timing is uncertain.
• Why health insurance now? No insurance company will easily give you insurance after you fall ill.
• Why SIP? Because we are lazy and don’t have the discipline to invest every month.
• Why retirement saving? Because life is long and children are not our retirement fund.
• Why asset allocation? Because it helps deal with all economic scenarios and can ensure peace of mind.
• Why spend? Because, it gives happiness and satisfaction.
• Why save? For continuous happiness and satisfaction in the future.
• Why go for a financial adviser? Very few people have the emotional intelligence to manage finances on their own.
• Why no cryptocurrency? Because it is highly volatile, and doesn’t have the backing of the government guarantee, doesn’t have a track record or history like gold, there is an operational risk of holding it, and there is a risk of permanent capital erosion.

Albert Einstein famously said, “If you can’t explain it to a six-year-old, you don’t understand it yourself”. And this can only happen if one starts with a WHY? I hope this exercise of reading my WHYs has given you some perspective about your own WHYs. The WHY can also help weed out ideas and investments that may not suit one’s risk appetite, values and goals and helps in having clarity and build conviction on a financial decision.

Financial stress is the biggest stress in most people’s lives. So next time you save, invest, or plan a foreign trip, start it with a WHY?

(Amit Grover is AVP, training at DSP Mutual Fund. Views are his own)