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Money Jan 1, 2013

10 New Year resolutions for financial well-being

By R Jagannathan

As we get ready to wave goodbye to 2012 and welcome 2013, it is time for some New Year resolutions to improve your personal worth. Here are 10 suggestions.

First, I must take charge of me financial future. We depend too much on experts and tips and friends' advice on the jobs we should take, on how we should spend, and on the investments we choose to make. But the key is not good advice alone, but the ability to choose the right advice. You cannot differentiate between good and bad advice unless you become financially and economically literate yourself. This means you should read more business papers, more books on personal finance this year.

Second, I must understand basic economics. When the economy is slowing down, when the world is slowing down, you can't expect to do better. You have to change your behaviour whether you are looking for a job, or wondering about how to save or invest. In a slowing economy, salary expectations should be moderated. A lower salary in a more stable company is more important than a risky job in an uncertain company. This is common sense, but we still tend to go for higher salaries, riskier investments. 2013 is not the right time to be greedy. You must also understand basic linkages between one economic variable and another: for example, when rates fall, stocks can rise. Also, it is liquidity (lots of money chasing stocks) that moves markets, not just fundamentals.

Third, I must understand that life insurance comes first. Unless I am already past retirement age, or have no dependents. The best insurance for most people is term insurance (insurance for a fixed period), or whole-life policies, where nothing is paid unless you die. These are the cheapest and best policies. Money-back and Ulips are not good enough as insurance. You life insurance is about helping your dependents if you are not around. Insurance is risk cover, not really investment. Money-back and Ulips are not really insurance. You should separate life insurance from investments.

Don't lock away all your funds in one asset class. Reuters

Fourth, I must take medical insurance for me and my dependents. If your company does not provide free medical insurance, you should buy one yourself. As long as you enter early, you can stay insured even till you are 100 - though the premia tend to rise excessively after the 50s.

Fifth, I will understand risk. Risk has two components - if we don't take risks, we don't get higher returns. If we take too big a risk, we may end up with nothing. A good way to make sure you avoid both traps is to decide on asset allocation: how much of your money (or monthly savings) you want to put at risk, and how much you cannot afford to lose. If you have Rs 100, and you are willing to lose only Rs 20 in a high-risk investment, your asset allocation ration should be 80:20 - 80 percent in fixed deposits, tax-free government bonds, NSCs etc, and the rest, maybe, in stocks or gold or whatever.

Sixth, I will invest only in stocks I understand. The best way to invest in stocks (if you are not an expert) is to buy index-linked mutual funds or exchange-traded funds (ETFs). If you know a little more about stocks, stick to the big index-stocks and market leaders like TCS, Infosys, HDFC Bank, Reliance, Hindustan Unilever, etc. These are well-run companies, and over the long term they will give returns higher than your fixed deposits. Long-term means three to five years.

Seventh, I understand that real estate is not an investment. This statement does not apply if you are in the real estate business or are a big expert in land and property, but if you are an ordinary middle class person, you should buy property only for living in it. You may benefit if prices rise unexpectedly, but this also means your next property will cost more.

Eighth, I know that gold is not ultimately about returns, but value preservation. Gold should be a part of everyone's portfolio not because it gives good returns (though it may do that too, and in spades sometimes), but retains its value over the long term. It helps you beat inflation, when fixed deposits or bonds will not do so. In the current situation, when inflation is still high, gold should be a part of your savings.

Ninth, I will not invest and forget. Make sure you periodically check how your money is doing. Maybe once in six months. Even with the best of advice, investments can go wrong. So you have to correct them. No point being angry over mistakes.

Tenth, I won't put all my eggs in one basket. This is a corollary to the asset allocation rule. Your money should not all be in stocks or bonds or FDs. There is a downside to this rule: sometimes concentrating your investment can give you better returns in the short term, but you can also lose a lot if things don't go your way. 2013 in one year when putting all eggs in one basket can be risky.

by R Jagannathan

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