Wealth in 'a' basket!

Earners in every stage of their life cycle worry about the wealth and its baskets!..Young earners worry about the number of choices before them; middle-aged like to be sure about being on the right track; retired investors, who have built wealth over a lifetime, stress about its adequacy. They seem to be caught in the web of multiple financial goals, numerous investments designed to meet those goals, and the stress of monitoring and managing with too much mathematics.

Here are a few simple practical tips to loosen the knot in the throat.

Savings are likely to be held in five broad categories—real estate, equity, debt, precious metals, and cash.  

There is no one way to create and build wealth. The process is completely customized depending upon the personal statistics of each person. However, one common trick is to diversify, or to ensure that your wealth is spread well across these categories or 'baskets'. You might buy a house early in your career. You may not be conscious about your PF deduction building up as your debt portfolio. You may be churning your money in stock trading and IPOs without a specific plan. You could be investing via SIPs in a dozen funds, hoping they turn out fine in the end. Every time you make an investment, rather than to focus too much on it in isolation, try and see what it does to what you already have. You might have laid your hands on a golden egg, but, it should be remembered that it should also be evaluated with the complete portfolio on investments.

There goes a saying 'Never keep all your eggs in a single basket', which means that one should diversify in order to reduce the risk of unfavorable events. However, while adding or switching 'eggs' in one basket, it should be considered that it will also have an impact on the other baskets!

For example, if you have bought a property and it represents all the wealth you have, be conscious about building other categories of wealth before jumping in to buy one more. If all your savings are in deposits, PPF and such products, make sure you add some equity funds. If you are obsessed with gold, ensure you don't invest all your savings in it. It is fine if you have spent a few years of your life building one type of asset; focus on others in the next few. Building debt in the first five years, adding a home in the next 10, adding equity in the next five, and spending the rest of your earning life building each one of these into a bigger size is not bad at all. You don't have to do everything at the same time.

Also, it should be kept in mind that the various investment opportunities available have different tax treatment, which have a significant impact on the returns generated. For instance, if you decide to invest Rs. 1,00,000 in debt components, investing the same in PF or PPF would yield a 12.30% tax adjusted return, as compared to a Bank Deposit which may yield something around 8.50%. However, the flexibility of a Bank Deposit may not be available with amount lying in PF or PPF. Thus, the personal statistics of the person shall be the deciding factor in such cases. However, if you invest only to save taxes, your wealth will suffer the long-term peril of poorly chosen products.

Another aspect is the timing of investment in a particular 'basket'. In the early days of earning, one may have time and attitude to take risks in equity. However, without the cushion of wealth, that would be risky. In the middle age when the expenses are low and savings are high, buying a property may be well suited. In the retired phase, protecting capital and getting an income shall be the main objective.

Long-term wealth building needs a good balance among the various investment alternatives. Always look at your wealth and question if you have too much or too little of something. If an investment product is offered to you, look at it in terms of how it would add to, or take away from the balance between all the components you already have. Have a target for making corrections and work on it. For instance, if all your savings are going back into your business, and you have bought property with all the gains you could stash away, recognize the lack of debt in your portfolio, and begin to build it. By the time you retire, if you have 30 per cent of your wealth in property, 30 per cent in equity, 30 per cent in debt and 10 per cent in cash, you have balanced your wealth well.

Also, you should not let your attitude alone to drive the wheel while making investment decisions. You must protect and fence your wealth from your emotions, insecurities, and over optimism. Whether you bought equity shares, or set up your business, you would face a crunch from the ups and downs of equity. Not all of us can fall on the ground face flat and start all over again. So, always remember to set aside a portion of your wealth in debt products before pursuing your dreams, which may be trading stocks, so that your family is protected.
Building wealth is all about allocating your funds across the various available alternatives in the optimum proportions which is best suited for you depending upon your personal goals. Do not miss the woods for the trees, trying to search for the next best thing to buy, or panicking about economic cycles. You have at least 40 years or more after you turn 25 to build and enjoy your wealth. And those who have started before that, accolades, you can now gift your spouse an extra ring!..