Monday, November 17, 2008

Tough times don't last but tough investors do!

Someone has said, “Success is going from failure to failure without losing courage.” Similarly, you can translate these words in the world of investment markets, “Success is going from one market cycle to another without losing your capital.”

How do you ensure that you survive financial turmoil? What can be done? In such markets, it’s important to review your financial situation. Ensure you are in a comfortable financial situation for the next few months. How many months should you consider for such a scenario? That is entirely a function of your view on the stability of your job or profession.

Assume that your financial situation is comfortable and you have surplus to invest. This means, you have a regular income and are generating surplus month after month after meeting your regular household expenses. For such investors, the current stock markets offer good investment opportunities. A bear market (when stock prices are low) is good when you have money to invest.

But if your finances are stretched, what should you do? Such a situation may arise when your future income may become uncertain – especially the bonuses or incentives that you are likely to earn. Or the same may have already been reduced. Well, it is time to look at the other side of the equation – the expenses. There are two types of expenses, discretionary and non-discretionary. Some expenses can be avoided some cannot be. There are expenses like electricity bill, telephone bill, house rent or home loan EMI, kids’ education expenses, and some others, which cannot be avoided. On the other hand, there are some expenses that can be reduced.

At such times, remember what Benjamin Franklin said, “Beware of little expenses. A small leak will sink a great ship.” If you are going to a restaurant for dinner once a week, you can reduce it to twice a month. For a family of four, a dinner outing may cost Rs 1,000 to Rs 2,000 at a decent place. If you go for such dining twice instead of four times, the savings could be as much as Rs 2,000 per month to Rs 4,000 per month. If you go to a multiplex for a movie, the tickets cost in 3-digits per head. If you go with small kids, add Rs 100 for each of the popcorn baskets that the kids ask for. Stay at home and enjoy a nice movie on the home theatre and save roughly Rs 1,000. Many such expenses can be avoided and it is possible for a middle class family to add to the savings by a reasonable amount.

Such savings can be then added to investments or can be kept in liquid accessible form depending on your needs and ability to put the money at risk.

Someone has very nicely said, “Your lifestyle could be your biggest asset or your biggest liability.” How apt! Incidentally, lifestyle expenses are a function of the prosperity or the level of earnings at the prevailing time. However, changes in lifestyle expenses happen slowly if you do not take deliberate and planned action. Expenses increase like the story of the frog in the frying pan. If you put a frog in a hot frying pan, it will immediately jump out. But, if you put a frog in a frying pan at room temperature and slowly increase the temperature, the frog does not feel the change and may even die if the temperature goes up very high. Lifestyle expenses creep up at a slow pace and one does not feel the increase.

On the lighter side, it is only when the reported inflation figures are high that most of us start complaining. Reported inflation figures make a good conversation starter at get-togethers.

Once again, it is important to remember the savings equation. Saving is nothing but income minus expenses. It is possible to exercise control over both the income and the expenses to some extent. The decision is in our hands.

I would once again quote Benjamin Franklin, “In short, the way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality; that is, waste neither time nor money, but make the best use of both.”
- Amit Trivedi

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