{"id":460,"date":"2019-01-23T21:19:32","date_gmt":"2019-01-23T15:49:32","guid":{"rendered":"https:\/\/srinivesh.in\/blog\/?p=460"},"modified":"2019-07-22T12:29:06","modified_gmt":"2019-07-22T06:59:06","slug":"personal-finance-rule-4-boring-is-better","status":"publish","type":"post","link":"https:\/\/srinivesh.in\/blog\/personal-finance-rule-4-boring-is-better\/","title":{"rendered":"Personal Finance Rule 4 – Boring is Better"},"content":{"rendered":"

One of the most complex aspects of personal finance is to choose among the myriad of investment options available. It is easy to mistake a complex, slickly presented product to be a better product. This post puts forward the view that the reverse is often true – a simple, easy to understand product is better.\u00a0 Often people find complex products exiting and simple products boring. We argue that in personal finance, “Boring is Better”.\u00a0<\/span><\/p>\n

This is a companion post to the India version of Harold Pollack’s Index Card – Pollack\u2019s Index Card: All the financial advice that you ever need \u2013 India version<\/a>. As originally stated, this point reads:\u00a0 Invest in lower-cost, equity mutual funds, before getting to individual stocks. <\/em>The larger suggestion is:\u00a0 Look for more passive, simpler options before getting into active, complex options. Note: This post strays a bit from the tagline of the blog and is light on data and heavy on opinions.
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The essence of the rule – Don’t compete with “Mr Market”, and his friends<\/h3>\n
Mr. Market<\/b> is an allegory created by investor Benjamin Graham<\/a>.  Graham asks the reader to imagine that he is one of the two owners \nof a  business, along with a partner called Mr. Market. The partner frequently offers to sell his share of the business or \nto buy the reader's share. This partner is what today would be called manic-depressive, with his estimate of the business's value \ngoing from very pessimistic to wildly optimistic. The reader is always free to decline the partner's  offer, \nsince he will soon come back with an entirely different offer. Since its introduction in Graham's 1949 book The Intelligent Investor<\/a><\/i>,\nthis phrase has been cited many times to explain that the stock market tends to fluctuate.<\/pre>\n
This post is not talking about equity markets alone. Many of the suitable investment products are market linked – be it debt, equity, commodities, etc.\u00a0 A section, possibly a majority, of the investors in India completely shun market products in the financial industry – they stick to conventional bank deposits and investment-cum-insurance products. On the other side of the spectrum, many investors get too deep and too fast into market products and make poor decisions.<\/p>\n
While there are many, many possible examples, let us look at an equity example first. Even in a market product like equity mutual funds, there are a variety of funds with a broad range of volatility. There are funds that seek to outperform the market. And there are simple and plain index funds that track broad indices like Nifty 50, Sensex, etc. The index funds may give the exact returns of the underlying index, and this need not be bad at all.<\/p>\n
To give an example in the fixed income space, many people get excited about (secured and unsecured) 10-year bonds, with market-driven interest rates, that have varying levels of credit risk. And there is the plain, old Public Provident Fund which is steady, some would call it staid or boring. For most needs, PPF would be a better product than many long-term bonds. (Please see this post for an argument on why every Indian should have a PPF account<\/a>.)<\/p>\n
For every invement need, there could be examples of this:\u00a0 Steady, boring approach\u00a0 vs Exciting, more active approach.\u00a0 To better appreciate why\u00a0 the steady approach is better,\u00a0 we should look at the concept of CRATON.<\/p>\n
Corpus is more important than Return<\/h3>\n
Asan Ideas For Wealth is a well-administered closed Facebook group that is focused on personal finance. The admin, Ashal Jauhari, uses many acronyms in his interactions. (A full list is here<\/a>.) One acronym that is very relevant to this topic is CRATON – Corpus Ready At Time Of Need. It is often used when people ask questions about some ‘exciting’ way to get more returns:\u00a0 “CRATON is more important than Return”.\u00a0 This statement has deep meanings.\u00a0 One interpretation would be this:<\/p>\n
“I have a comprehensive plan for all my financial goals.\u00a0 I have selected investments aligned to the plan and I am investing regularly in them. I am on track to create the corpus I need for the goals. It does not matter if my neighbour is earning a better return on her investments. I am focused on building the corpus that I need, and ensuring that it is ready when I need it.”<\/p>\n
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What is the evidence that investors chase returns?<\/h3>\n
We have some spotty data points from India.<\/p>\n