It is amazing how most people I meet can mouth many of the basic investment philosophies but do not understand the wider implications of their financial decisions. They broadly know that it makes more sense to save and invest, but do not realize this when they behave financially WRONGLY when it comes to their own self. Like all of us know that if there is something which causes short term pain, but long term gain, it is worth doing. Like saying no to the gulab jamun. They may know – almost instinctively that it’s better to save more and spend less, but they probably don’t grasp the full opportunity cost of their decisions when they misbehave financially.  

Let me share some of the things that people do. Here is a girl, an MBA in finance who understands asset allocation, can write an article on why equities are important, but her own money is in bank fixed deposits, predominantly. Delaying investments and investing in wrong asset classes is almost a given. Many of my young (and not so young) blog readers, friends, and clients have asked me about the wisdom of delaying their equity SIP contributions in order to pay for a bigger house than they need. Their assumption is that their new house will appreciate considerably over time to offset the missed investment gains. I connect them to many calculators and articles but their mind is already made up. Damn the facts.

Then there are some kids who think that postponing investments is a given because they have loans – educational loans to repay. Or that they should delay investing because they are young and should now ‘live life’ and savings and investments can be done later. Sadly this is true ONLY and ONLY if your parents have done a lot of saving and sensible investments and they have enough surplus to give you after their long life of say 93 years on the planet. Anyway till they actually give it to you it is still money in the bush, not in the hand. So it comes as a shock to many when I explain that missing out on a significant period of compounding can cause a huge detriment to your long-term financial goals. There are enough ‘cost of delay’ calculators available online – and see the numbers for yourself.

On the opposite end of the spectrum are older people in their mid 50s / retirees or those close to retirement.  Most times, a person at this age (sometimes even younger) might want to liquidate an equity or an equity mutual fund investment to pay off his or her mortgage at 9%, simply for the peace of mind of having no payment.  While the desire to be debt free is understandable, the cost in taxes from the liquidation (sometimes) combined with the years of compounding lost on that amount easily dwarfs the total interest paid over the life of that mortgage, assuming even conservative rates of return. Even assuming that equity gives you 13% return over a 8-15 year period, the gap of 4% is huge, real huge.  Yet perhaps eight of ten people who ask(ed) me over the years have listed this option as their first step towards financial sense!

Sheer experience in training, and talking to people about money has made me conclude that these behavioral disparities can be explained partially :  many know the basics of finance and investing, but few truly understand the implications of the basic principle of opportunity cost.  Sadly this includes some smart bankers, venture capital providers, MBAs, Chartered Accountants, etc. Financial education tends to condition us to look at financial decisions in somewhat of a vacuum where choices are binary and are limited only to those presented in a nice, clean problem. So the same kid who can tell you (using detailed maths) when a boiler in a cement plant should be replaced, they have no clue about how much they require for retirement. No clue.  There is a mention of the long-term, but to many, the long-term is, well long term and therefore not worth thinking about.  Without imagining the impact in 40 years of a decision we make today, it is extremely difficult not to make poor financial choices.

What better than to quote Rakesh Jhunjhunwala? Here is an extract from the Forbes magazine: “But he has also sold parts of his holdings in Titan, Lupin and CRISIL. “I wish I had not sold CRISIL, but I have.” In 2005, he sold Rs 27 crore worth of CRISIL shares and bought a house in Mumbai. “That house may be worth Rs 50 crore today, but if I had held on to the shares, they would be worth Rs 700 crore now, and tax-free,” he admits.

It is only by considering the complete and full array of financial implications our life decisions that we can make truly sensible and prudent decisions. This will allow us to make the best use of our limited resources.  Choosing one option necessarily means forgoing not just one other option, but possibly many more once the final costs are tallied.  Failure to appreciate this may not be a mortal hit to our net worth, but it is likely to destroy some very nice choices later on in life. Sigh.
Alas these decisions have to be made TODAY and the impact will be known TOMORROW.


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  1. Great insight as always Subra. I find myself saving to pay off a personal loan as soon as possible due to career uncertainty. Investing has definitely taken a backseat.

    I long to have the clean slate I had in my early twenties. Yet it’s never too late and I hope even though at this later stage (34) I can make prudent financial choices. The first one I made last year is to be debt free, I plan to achieve the same by end of 2016.

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