This is the eighth article in the personal financial planning for seafarers series by the very experienced Chief Engineer Rajeeve Kaushik. You can read the previous articles of the series here –7 Secrets Seafarers Should Know About Mutual Funds, Importance of Financial Planning for Seafarers , 10 Common Financial Mistakes Seafarers Make , Little Know Facts About Magic Of Savings Seafarers Should Know , 4 Types of Investments That Kill Seafarers’ Hard Earned Money , Insurance- What Seafarers Must Know Before Purchasing, Savings and Investments For Seafarers – Getting Started
During my lifelong journey of discovering my path amongst the world of financial maze, there was a mind-set that took about a decade to clear, and very often I find the same amongst my readers also, who communicate with me regarding their own portfolios. This is the case of FINANCIAL CAULDRON.
Cauldron as per English dictionary is a large pot in which various ingredients are put in order to cook them into a soup, broth or stew.
Before we talk about the cauldron, I must explain another factor what I have come to call as, the colour of money.
Let us take two examples:
- You get a regular monthly salary, and then you receive a yearly bonus. How do you perceive the two separately?
- As compared to your regular monthly salary, how do you perceive and treat the handsome profit that you have booked on the rung up share of a company.
- Your family is hankering after you for a vacation in the exotic Caribbean Islands. What do you do? Whether you liquidate your FD earning 8.5% taxable interest OR sell the Microsoft or Infosys shares which have already rung up a few times of the original purchase price.
- Do you prefer to save your salary and liquidate the savings or investments that you have made?
You will answer the above questions depending upon the lifelong philosophy that you have cultivated on your own and by observing your parents, friends and neighbors .
However what is more often true is that apart from your fixed salary or income that you receive anything and everything else you see, is with a different colour. Somehow any rise that you find in your investments seems less attractive than the salary or the increment that you receive on the salary. Hence any windfall profit that you see accrued on your investments is seen as less serious money and immediately taken away from the table. With that the original Golden Goose which was giving you the regular egg is also “cooked”. Which means that you have not allowed your investments to have their full life or maturity and have killed them on the way.
Now extend this understanding to the FINANCIAL CAULDRON that I mentioned on top. This cauldron is like the fabled large pot with a fire burning under it and a lots and lots of ingredients inside it. These ingredients that you have put inside are your salary or savings account, Bank FDs, Post Office savings instruments, Life insurances that YOU FEEL are investments, debentures, Gold, Silver, Property, the extra house(s) on rents , stocks and Mutual Funds and any other unconventional investments that you have.
Under this Bronze shining Cauldron lights the fire of time, that slowly heats everything till the broth is nice and ripe and ready to be removed in a cup and consumed when you need .e.g. parent’s sickness, children going to college, their marriage, buying a permanent house for your retirement or the retirement itself.
The problem exists at 2 points.
FIRST, you do not see the soup or the broth as a whole and start finding out how much individual constituent of the soup is worth e.g. you are not bothered about the Bank FD that is giving you only 8.5% return which is actually taxable in your hands. You are spending more time with your stocks and Mutual Funds where you have invested only about 10-20% of your FDs amount and are giving about 12% tax free return and compounding annually since you are not withdrawing. Furthermore, you are growing impatient with them. You are not able to wait even for the time corresponding to your fixed income assets (those that are giving you assured returns like the FDs and other constituents of the Cauldron.
SECONDLY, you are looking at each item of your Cauldron (portfolio) singularly. For each and every item or MF scheme you are checking individual returns and comparing them with other unrelated investments avenues. e.g You may be comparing a Large Cap Equity fund with a Debt Income fund or a Small and mid cap fund. Even worse you may be comparing the rise of your real estate with your PPF or the Post Office schemes that you have invested in.
This is an incorrect tendency. Because each avenue where you have parked your funds in unique and different in itself. A Fixed income asset will be easy to calculate because it will give you definite but small return. Whereas a MF or a direct stock might give you such astonishing returns in a very short time that it may wipe out years of negative returns.
The question is how to go about?
When you are invested in all the above assets, it is good to monitor their appreciation collectively, but only once in a while. In a certain period the foreign exchange may not appreciate but the stock market will boom and bring up the total value of the corpus. At times reverse may be true. So the idea is to keep all types of assets in your cauldron. This is called ASSET ALLOCATION, and despite whatever the financial planners will tell you; nobody can decide it better than yourselves. But do diversify your investments with maximum in quality MFs and stocks and minimum in real estate. After that, aim to maximize the quantum of investment by additional purchases. Do not worry about things individually based on their performance. If you have made a good selection, chances are that you will be sitting on a very neat pile of cash by the time you retire.
Going back to my question of COLOUR OF MONEY in the beginning. If you stop perceiving the returns on your investments and savings as earned with lesser hard work and treat that money same as your salary you will let your investments stay and grow instead of removing them and consuming. Instead use the salary that you earn every month. If the salary is not enough, you may use the annual bonus and that you have saved in your bank account for contingency and expenses, but let the Cauldron alone and let it grow.
Disclaimer: Author is a Chief Engineer from the Merchant Navy and has no formal qualification in Financial Planning. Views expressed are based on his own experience and that of others who have benefitted with his help. He may be reached at the forums. The author and Marine Insight shall not warrant or assume any legal liability or responsibility for the accuracy, completeness or usefulness of any information provided herein