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In our post Why Is Investing Confusing?An infographic  we saw that Investing is confusing because it is a very large subject With many different people having as many different opinions. In this post we shall talk about what is investing?

Why Is Investing Confusing

Investing means different things to different people. That is why it seems so confusing. Recap from Why Is Investing Confusing?An infographic Let’s look at what people talk about investing.

  • Different people invest in different things: Some people invest in large families- a way to ensure care for parents in their old age. Some people invest in good education, job security and benefits.
  • There are different Investment Products such as stocks, bonds, mutual funds, real estate, insurance, commodities and precious metals.
  • There are different Investment Procedures such as Buy, hold and wait (long), buy and sell (trade), sell and then buy (short), options (trade), broking (trade no position) etc.
  • Investors are classified by their procedures and their products. So there is a stock trader, a real estate speculator, collector of rare coins, commodity futures trader, a day trader, and a saver who is happy putting his money in a bank.
  • Under the banner of investing we have people who are really gamblers, speculators, traders, savers, dreamers, and losers.

So what is investing?

Investing is a plan not a product or a procedure.

What do you recommend I Invest In?

Robert Kiyosaki, author of theRich Dad Poor Dad Series,in his book Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not! recounts a conversation about when he is asked  “I have $10,000 to invest. What do you recommend I invest in?” Quoting from Investor Lesson 4:

A few months ago, I was on a radio station in San Francisco. The program was on investing and was hosted by a very popular local stockbroker. A call came in from a listener wanting some investment advice. “I am 42 years old, I have a good job, but I have no money. My mother has a house with a lot of equity in it. Her home is worth about $800,000 and she owes only $100, 000 on it. She said she would let me borrow some of the equity out so I could begin investing. What do you think I should invest in? Should it be stocks or real estate?”

Again my reply was, “Do you have a plan?”

“I don’t need a plan,” was the reply. “I just want you to tell me what to invest in. I want to know if you think the real estate market is better or the stock market.” “I know that is what you want to know . . . but do you have a plan?” I again asked as politely as possible.

“I told you I don’t need a plan,” said the caller. “I told you my mother will give me the money. So I have money. That’s why I don’t need a plan. I’m ready to invest. I just want to know which market you think is better, the stock market or the real estate market. I also want to know how much of my mom’s money I should spend on my own home. Prices are going up so fast here in the Bay Area that I don’t want to wait any longer.”

Deciding to take another tack, I asked, “If you’re 42 years old and have a good job, why is that you have no money? And if you lose your mother’s equity money from her home, can she continue to afford the home with the added debt? And if you lose your job or the market crashes, can you continue to afford a new house if you can’t sell it for what you paid for it?”

To an estimated 400,000 listeners came his answer. “That is none of your business. I thought you were an investor. You don’t need to dig into my private life to give me tips on investing. And leave my mother out of this. All I want is investment advice, not personal advice. ”

One of the most important lessons I learned from my rich dad was that “Investing is a plan, not a product or procedure.” He went on to say, “Investing is a very personal plan. ”

We often confuse investing with products or the procedures.

Investment Products Are Vehicles Like Cars And Trucks

Investment products are often called investment vehicles. All a vehicle does is to get you from point A to point B. So, an investment vehicle simply takes you from where you are financially to where you want to be, sometime in the future, financially. There are many different investment products, or vehicles, because there are many different people with many different investment ‘needs’, just as a family with five children has different needs than a single person or a farmer. Gears in Investment Vehicle explains about investment products as investment vehicles.

Investing Is Like Planning A Trip

Let’s say if one has a plan to go to a hotel in Delhi. He either takes a train or flies to the city. From there he either takes a rickshaw, a bus or a taxi to go to the hotel. In this plan he can choose from many vehicles. He will decide the best choice suitable to him based on the time and money he has. If he has to reach in a day from Bangalore to Delhi flying is the only option. Similarly one chooses the investment vehicle according to one’s needs, means, time, nature, risk taking capability. A person who is scared of flying would prefer not to go in the airplane. We need to become familiar with the various investment vehicles, the costs, taxation, returns and our own risk profile to choose the investment vehicle. Investing is like a jigsaw puzzle we need to find all the pieces and put it correctly to complete our financial picture.

It Takes More Than One Vehicle

Too many so-called investors get attached to one investment vehicle and/or one investment procedure. We all know people who invest only in stocks or those who invest only in mutual funds or real estate. Try talking to them about other investment products or procedures and often we see that the person has become attached to the vehicle and fails to see all the other investment vehicles and procedures available. It’s just that they often focus on the vehicle rather than their plan. A true investor has a plan and has multiple options as to investment vehicles and procedures. As we don’t fall in love with the airplane we fly on or the taxi we take and leave it when it finishes serving the purpose. Similarly we should not fall in love with mutual funds, stocks, bonds, or buildings . We should treat them as simply vehicles, investment vehicles to take us to where we want to go. Different vehicles fill different needs – to go from Bombay to Kolkata flight is the fastest option but to go from Netaji Subhash Chandra airport to the hotel a taxi or bus is appropriate.

Investing is Very Personal

Let’s say you’re go to this restaurant or a movie which has got great reviews and your friend has also recommended it to you. And you don’t like the food, you don’t even like the decor and you wonder why it was so highly recommended. We often don’t agree with our own family members on the best cricketer or actor ! My father likes Balraj Sahani, my husband prefers Aamir Khan, my friend Gunjan is crazy about Akshay Kumar (she even liked his movie Kambakht Ishq ),  my niece Abhishek Bachchan, my children adore Imran Khan and I prefer Shahrukh Khan. Who is Your favorite actor? Ask six different people for advice and you’re likely to get six different answers or at least three.

Same is with the finances or investments. The news papers, magazines,  bloggers and best-selling authors are all sources of information. They may have good ideas, but they don’t know you. They can’t tell you how the information and the ideas apply to your situation. There are  similarities between peoples’ financial needs at a broader level, People save for education of their children, or for retirement or to buy a house.But the extent of need for finances, the timing of the need and more important the risk taking ability of each person would differ greatly. Our Insights into Financial Goals of Indians covers the TNS’s survey Trends & Insights into Financial Goals of Indian Consumers conducted by Ameriprise Financial. Ranjan Varma’s:Why Is It Called Personal Finance(Apr 2009) explains the concept of why finance is personal with examples from themes of India Elections and India Cricket.

So one needs an investment plan,a very personal plan based on your preferences, needs. And your investment plan will then determine the different types of investment vehicles you will need.Your investment plan has to be unique just like you.

No Time for Investment Planning

Often we see people buying tax saving investments when they get mail from Accounts Dept about the last date for producing proofs for tax saving investments, otherwise a sizable amount will be deducted from their salary as tax. Then they go and buy some tax saving investments and submit the proof without understanding why they bought the product.  We concentrate and act upon deadline-driven projects, and official meetings. We complain of No time for making a investment plan! Most people spend months planning their next one-week vacation but they won’t set aside a few hours to plan the rest of their financial future!

Managing our money is way down the list of priorities as JP Morgan’s Generation Busy Report (Apr 2012) revealed that Brits spend considerably longer researching a car purchase (ten days), or booking a holiday (two days), than they would researching savings and investment products (ten hours).  Situation is not much different around the world. Just like Those who think they have not time for bodily exercise will sooner or later have to find time for illness.  Just like No Decision is a Decision, Not making a plan is also a plan, you would reach somewhere.  I would like share conversation between Cheschire Cat and Alice from the book Alice in Wonderland

Alice in Wonderland

Alice and Cheshire Cat from book Alice in Wonderland

Procrastination and not giving priority to financial goals and investment plans may turn out to be costliest mistakes that one can make. Spending precious time thinking about longer term concerns – like investments – will pay dividends in the future.

Related articles: For overview of Investing, Why Is Investing Confusing?An infographicInsights into Financial Goals of Indians, Subramoney:Secret of successful Investing: Philosophy or Style Statement(Feb 2008)

Before a person builds a house, he or she usually calls in an architect to draw up the plans. Could you imagine what could happen if someone just called in some people and began to build a house without a plan? Even if people gets flats in apartments each flat is so different because of the personal taste and preferences of its residents. Just as somebody else’s medicine could kill you, so also somebody else’s financial plan could spell Hara Kiri. Your investment plan has to be unique just like youI am reminded of the Japanese proverb Planning without action is futile, action without planning is fatal. So what’s your investment plan? Do you differentiate between the investment plan and investment product? Do you think making investment plan is a waste of time?


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