There is Nothing Like A Bad Investment Tool

There is nothing like a bad investment or a good investment tool. Each investment tool serves a definite purpose for a specific class of investor. Instead of asking for the best flower from the bouquet, one must try and understand the class of investor one is, and try to pick the most relevant investment to that class.

"I think this is some allergy on my skin."

"Yeah, looks like.", as I checked Rohan's right hand. 

Rohan, a good friend of mine, has also been taking financial coaching from me under the ELITE Program for some time now.

"I think that I must show this to a good dermatologist.", Rohan sounded a bit concerned.

"Yes, you shouldn't delay.", I reverted. "Let me share the number of Dr Bhatia with you. He is a good friend of mine and has been of the best dental surgeons around."

"OK..thanks...But what did you say, He is what?"

"The best dental surgeon."

"Are you kidding with me, Manoj? Why should I go to a dentist for a skin problem?"

"Well, because he is the best doctor around."

"Brother, he may be the best, but he is the not the best fit for me."

"Hold on to this thought, Rohan. - He is the best but may not be the best for you."

"What is so special in this thought? I mean, I just do not get it Manoj."

"There is. Last week, when I was trying to explain this concept to you, I found that you were quite adamant in seeking advise for the best investment in the market. I told you that a question which seeks a best investment in the market, is as redundant as it is stupid."

"Oh, now I get the context of the absurdness in your recommendation of a dental surgeon. So, are you saying that there is no best investment in the market today?"

"If the best doctor does not make sense to you, the best investment also should not make any sense. Because the question itself is flawed. What is the best investment in the market?, Is xxx a good investment?, Is xxx a bad investment?" - all these are flawed questions, just like - Is Dr Bhatia the best doctor?"

"Then what is the right question I should be asking?"

"You asked it just a while back."

"What?"

"Which is the best doctor for you?" rather than "Which is the best doctor?" And those last two words make a world of difference at how you look at various investing options.

"Hmm...I am getting it a bit..."

"You will get it. And you only tell me what do I need to know if I have to advise you the best doctor for you, Rohan?"

"You need to know about me and my health issue...simple.".

"Exactly, it is so simple, isn't it? On similar lines, if I have to suggest the best investment for you, I need to know about you and your financial portfolio, isn't it?"

"Ah Manoj, and that is why you were asking about my age, risk profile as well as my current investment split, time duration for which I can stay invested etc...".

"Absolutely Rohan ! Each investment vehicle exists because they serve a specific purpose for a specific set of investors. If they do not serve enough investors, or if their is a superior product available in that segment, such a vehicle will automatically cease to exist with time."

"I get it, though it sounds strange to hear that investment tools like FDs are also good investments."

"As I said, every investment makes sense for certain set of investors."

"So, tell me Manoj, Fixed Deposits are a good investment for whom?"

"FDs make a lot of good sense when you are just a teenager trying to understand the concept of compound interest, or if you are a senior citizen trying to avoid risks, or if you are looking for a regular monthly cash flow i.e. liquidity, or if you can stay invested for a very limited time frame or if you have very poor risk taking ability."

"Got it, and Stocks ?"

"Stocks, specifically long term investments, are useful for an investor who is ready to take entrepreneurial decisions, has high risk taking ability, understands volatility, is ready to stay invested for at least 7 to 10 years, is willing to learn and spend time in the market."

"and Mutual Funds?"

"These are the best investments for someone who has moderate risk taking ability, cannot spend enough time in the market, but is still ready to invest in a volatile market for at least 5 to 7 years."

"OK, seems that I am fit for Mutual Funds. Tell me some good funds in the market today."

" (smiling) Same mistake Rohan..Bad habits die hard. You need to probably re-frame your question.", I gave him ample pause to re-think and re-frame his question.

"Are you saying that even if I know that Mutual Funds are the best investments for me, we still need to dig deeper to decide the best mutual funds for me?"

Slowly but surely, Rohan was getting it.

"Of course, depending on numerous factors, we will take a call on whether we should go for debt base funds, equity funds, hybrid funds etc. Even within equity funds, depending on various factors, we need to decide the type of equity funds like small cap, mid cap, large cap etc.. Or if it is debt fund, understanding the risk factors of the underlying securities that the fund is invested into...etc."

"Wow..never knew that all this required such depth of study. "And where do investments like PPF, EPF fit into?"

"These investment tools are designed for those who are not disciplined enough by themselves, and would want someone to push them into a discipline of savings, and would like to leverage the power of compounding, and are looking for virtually risk free investments."

"And Gold? Bonds etc?"

"Gold provides a hedge for your market risk. Bonds may provide you slightly better post tax returns. Each one of them has an investor base for them. And of course a portfolio is not just one type of investments. It has different types to balance out the class of investors who are somewhere between these extreme traits. Nothing is absolute black or white in this world - and it is the same with humans. they are a mix of different shades of grey."

"hmmm.. I get it. I think that for the first time I have started to appreciate the power that each investment tool carries. Today, I understand that there is nothing like a BAD investment or a GOOD investment. The only question is whether a particular investment is a good investment FOR ME ? 

"Great Rohan ! Understand that no investment is a bad investment, and similarly no investment is a good investment. Each investment has a class of investors it serves. You need to identify your class, depending on your situation, your portfolio and your investment needs, and accordingly pick up your investment from the beautiful bouquet of available investment options. Return On Investments (ROI) can never be the sole deciding criteria to pick up an investment. There are so many other factors that decide the right investment for you. And that is why we take so much time in each of the Steps when we build your financial freedom plan as a part of this prestigious ELITE program - because we truly want to understand you, your existing portfolio, your future needs, your risk taking capacity, your attitude to risk, your current portfolio liquidity etc."

"I totally understand what you say. Thank you for making me a part of this program. And I now need to go the best doctor that suits my needs."

We both smiled at the simplicity of life, and investments - and how complex we have actually made it.

Regards

Manoj Arora

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