As a part of my personal financial planning seminars, I come across thousands of customers who are looking for advisors. As a part of my training sessions, I come across millions of agents who are looking for customers. However, for me it is not just picking up a telephone number and passing it on.

This is because there is a huge difference between what my seminar participants say they want and what the agents I train are willing to do. Here is what a customer expects from his agent.

Please do not say you are coming do financial planning if you are only coming to sell me a financial product. I understand the words financial planning and know what a sales pitch is.I am busy. I run all day and some evenings.

When I have all the information presented to me, I tend to make fast decisions – whether it’s deciding which item to select on the restaurant menu (Rs. 300) or which car to buy in the dealer’s showroom (Rs. 12 lakhs). At the same time, I have no time to waste on mutual fund or life insurance policy (Rs. 240 lakhs over the next twenty years). . I may need to update my life insurance and pension plans. I need someone who is going to work with me and help me understand my needs and address them appropriately representing my best interests.
•    Please tell me about yourself – introduce yourself properly. I would like to know why you are in this “profession”. Are you here by choice, by force or you have just inherited an agency?
•    Tell me about the company (ies) that you represent and its reputation for reliability, service and quality of products. Has this company checked you for competence, basic education, etc. or have you been recruited as a part of its “trespassers will be recruited policy”.
•    Please do not make a sales pitch! Please suggest me appropriate products and tell me the basis on which I should choose them. Also, please tell me about products that you do not sell. I am willing to pay you a fee for suggesting products not in your portfolio. Fair enough?
•    Please get to know me. Please do not assume anything about me. Find out who I am, what I want and what concerns me. Be like my tailor, measure me every time we meet – it helps.
•    Please respect my time. In case you need 20 minutes say so. In case you need 60 minutes, say so. I get very upset if you seek appointment for an inappropriate quantum of time. I am happy to slot your appointment accordingly. I cannot keep clearing my throat and watching the clock on my table.
•    I will buy from you do not worry! I need to buy from somebody so why not you? I am comfortable buying from you, but do not start selling before you know what I need.
•    Please remember I will tell whom I want to tell – I know sales people like to boast about their latest “conquest”. When you ask me to share financial and other personal information with you, please keep it private. My wife, my brother, my colleagues, my boss, my assistant will all know from me, not from your boasting. Fair enough?
•    I need to know about financial products – I am a senior executive in a pharma company, not some stupid bumpkin. However, I am also not an expert in life insurance or retirement planning. Don’t just tell me I need more life insurance. Explain why you believe I do. Show me the steps and the logic. Remember I can think. Tell me how the particular product will benefit my family and me. Finally, tell me why you believe that a particular policy or strategy you recommend is the best choice for my situation.
•    Please don’t tell me what I can afford. That’s my call. Tell me the cost of having it and the implication of not having it. I can understand that if I am uninsured and I die my wife will be on the streets. Similarly, when you are asking me to sign up to a pension plan tell me what is the implication of a smaller monthly payment. I will tell you whether something you recommend is affordable.
•    Help me with the documentation and later – my car sales representative is absconding after I got delivery of my car. I am now chasing a telephone number for the registration book. When I buy a financial product, I surely need some handholding. I have been insured for the past 18 years and have invested in a mutual fund for the past 10 years. I have not been able to understand life insurance language.
•    I hope you will be in this profession – I have no time in my life to be chasing you. In addition, I do want to know whether you will be in this profession for at least 10 years. I have not changed my family doctor for the past 44 years – I hope to create such a relationship with you also.
•    Please feel free to admit your mistakes – I do not want my friend’s wife to review my portfolio and tell me I have been sold a lemon. Believe me you will make lemonade for me. If I find out, I have been sold a lemon, I will scream, and scream loud for all the regulators to hear. I will be hurt, but you will be finished. I have made many mistakes but I accept it and tell my boss before he finds out. Keep this going. It helps.

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Does this mean you should not invest and keep postponing your investment program?

No!

No doubt, being in debt, could make it tough for investors to make money; because if you have some high-cost debt it may not be possible to get returns higher than the rate of interest at which you have borrowed. Hence it is thought to be counter-productive to simultaneously invest as well as borrow.

Expert say

Many financial planners would suggest that you pay out or cut down your debt. In other words, if you have a credit card loan at an interest rate of 42% per annum (pa), the money you are investing will have to make more than 42% pa to make it more profitable than simply paying down the debt. There may be investments that deliver such high returns, but you have to be able to find them, knowing you are under the burden of debt. I surely cannot find them.

The debt trap

You may be paying off the following:

1. THE most expensive loan

This is your credit card debt. High interest is relative, but anything above 30% pa fits in this category. Carrying any kind of balance on your credit card or similar high-interest vehicle makes paying it down a priority before you start to invest.

Personal loans at 30% pa are also included in this category. Despite a bull market (which may last another five years?), getting a 30% pa return on a sustained basis is a pipe dream. Also did you know that SIPs started as back as a year back are now in the RED? (31 Mar, 08 – today’s comment). You should also be keeping track of your net-worth and for this you could go to www.myirisplus.com which has a software that helps you track your net-worth.

2. Low-interest debt

This can be a car loan, a line of credit, or a personal loan from a bank. The interest rates are usually described as prime plus a certain percentage, so there is still some performance pressure from investing with this type of debt. It is, however, much less daunting to make a portfolio that returns 12% pa than one that has the pressure to return 25% pa.

3. Tax-deductible debt

If there is such a thing as good debt, this is it. Tax-deductible debts include mortgages, student loans, business loans, investing loans and all the other loans in which interest paid is returned to you in the form of tax deductions. Because this debt is generally low interest as well, you can build a portfolio while paying it down.

Note: The types of debt we will cover in this article are long-term low-interest and tax-deductible debt (like personal loans or mortgage payments). If you don’t have high-interest debt or, better yet, all your debts are tax deductible, then read on. If you do have high-interest debt, you’ll need to pay it off before you begin your investing adventure.

The time to invest is NOW
Debt elimination, particularly of something like a loan that will take long-term capital, robs you of time and hard-earned money. In the long term, the time (in terms of compounding time of your investment) what you lose is worth more to you than the money you actually pay (in terms of the money and interest that you are paying to your lender).

You want to give your money as much time as possible to compound. This is one of the reasons to start a portfolio in spite of debt (but not the only one). Your investments may be small, but they will pay off more than investments you would make later in life because these small investments will have more time to mature.

The plan
Instead of making a traditional portfolio with high and low-risk investments that are adjusted according to your tolerance and age, the idea is to make your loan payments in place of low-risk and/or fixed-interest instruments. This means that you will be seeing ‘returns’ by the lessening of your debt load and interest payments rather than the 4-8% return on a bond or similar investment.

The rest of your portfolio should focus on the higher-volatility, high-return investments like equity shares and equity mutual funds. If your ability (or willingness) to take risk is very low, the bulk of your investing money will still be going towards loan payments, but there will be a percentage that does make it into the market to produce returns for you.

Even if you have a high-risk tolerance, you may not be able to put as much as you’d like into your investment portfolio because, unlike bonds, loans require a certain amount in monthly payments. Your debt load may force you to create a conservative portfolio in which most of your money is being ‘invested’ in your loans with only a little going into your high-risk and return investments. As the debt gets smaller, you can readjust your distributions accordingly.

The big picture
It’s a one-point conclusion: you can invest in spite of being in debt. The important question is whether or not you should. The answer is very personal and can be determined on a case-to-case basis. There is no denying that there can be benefits from getting your money into the market as soon as possible, but there is no guarantee that your portfolio will perform like it needs to. Such things depend on how adept you become at investing.

The biggest benefit of investing while in debt is psychological. Paying down long-term debts can be tedious and disheartening if you are not the type of person who puts your shoulder into a task and keeps pushing until it is done. For many people who are servicing debt, it seems like they are struggling to get to the point where their normal financial life — that of saving, investing, etc — can resume.

Being in debt is pretty much a state of limbo state, when things seem to be happening in slow motion. By having even a modest portfolio to distract you from the tedium, you can keep up your enthusiasm with regards to finances. Knowing that the sun will come up and being able to see the dawn are very different experiences.

For some people, building a portfolio while in debt provides a much-needed ray of light. It is like your first day at the gym. You keep regretting all the sweets, and fried stuff that you ate. What you can now do is get on the treadmill and start the work-out!

PS: Did you know that your weight is a much larger function of what you eat and a small function of how much you burn?

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Indeed, the U.S. financial debacle is now so ingrained – and a so-called “Super Crash” so likely – that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away – if it ever is, said Rogers.

The end of this crisis “is a long way away,” Rogers said. “In fact, it may not be in our lifetimes.” During a 40-minute interview during a wealth-management conference in this West Coast Canadian city last month, Rogers also said that:

• U.S. Federal Reserve Chairman Ben S. Bernanke should “resign” for the bailout deals he’s handed out as he’s tried to battle this credit crisis.

• That the U.S. national debt – the roughly $5 trillion held by the public- essentially doubled in the course of a single weekend because of the Fed-led credit crisis bailout deals.

• That U.S. consumers and investors can expect much-higher interest rates – noting that if the Fed doesn’t raise borrowing costs, market forces will make that happen.

• And that the average American has no idea just how bad this financial crisis is going to get.

“The next shock is going to be bigger and bigger, still,” Rogers said. “The shocks keep getting bigger because we keep propping things up … [and] bailing everyone out.”

When Jim Rogers speaks…you listen!

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“This year foreign capital has gone into reverse at the same time as India’s current-account deficit has widened sharply. Sharmila Whelan, an economist at CLSA, a brokerage firm, forecasts that India’s current-account deficit will rise to almost 4% of GDP in the current fiscal year, and to 5.5% next year. Not only is the trade deficit soaring, largely as a result of higher oil prices; the overseas earnings of Indian IT services companies (two-fifths of which come from the financial sector) are likely to shrink this year.

The nature of the capital inflows financing a deficit also matters. Foreign direct investment (FDI) is less volatile than speculative capital inflows. If we assume that net FDI continues at last year’s pace, then it would more than finance the expected current-account deficits in Brazil and Mexico this year. In contrast, net FDI might finance less than one-third of India’s deficit and only one-sixth of South Africa’s, implying that their currencies are more at risk. The rupee has fallen by almost 10% against the dollar since late last year. Ms Whelan forecasts that it will drop by another 9% by March 2009.”

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Like a friend says “Risk for these organisations is the quality of people they have hired to look after risk”. One risk manager says that risk for these organizations arises from the fact that they have employed such poor quality risk managers (Oh, they have fancy designation right from Risk officer to Director, Risk!)

It might shock some readers to know that for a long time (no clue whether it is now rectified) Citibank had no director level representation for risk. Shocking, I should say.

But after spending 20+ years in the financial services industry, do I understand risk? Not really.

I pride myself in choosing clients with whom I will do business – Hdfc mutual fund, Hdfc bank, Kotak, Icici, ING, SBI, Templeton, Hdfc standard life insurance, Icici prudential, …etc. However in a weak moment I did one small assignment for a Real estate marketing company based in the suburbs of Mumbai. My bill was a small amount. However for the assignment done in April, I am still awaiting for my payment!!

My father in law had a fixed deposit in Shriram Transport finance. When it came up for renewal I suggested he withdraw the same and put it in South Indian Co-operative Bank Limited. My logic was if there is a group whose MF has been stopped by SEBI it cannot be a good place to keep a Fixed Deposit or buy a life insurance product.

However South Indian Co-operative bank closed down (my FIL, as a senior citizen has recovered most of his money) but Shriram group is doing well, prospering and is paying on time.

However my father in law has stopped asking me for advice!! Luckily whether it was with a real estate marketing company or with my father in law, both the risks were managable because of the size of the transaction.

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However the following are the reasons to own gold:

1. Global currencies are at an imbalance: US $ is not the only currency which is in bad shape. In fact currencies are today at quite an imbalance with each other. So if you do not know whether to hold your money in rupees, lira, yen, dollar, euro or pounds, choose gold. So clearly as much of cash you will keep in your portfolio is the amount of gold you should be having.

2. Investment demand for Gold is accelerating: yes too many people are touting this as a great hedge. And they prove this by doing a 3 year back testing. Fantastic. If you did a 10 year back testing, it will fail and fail badly.

3. Ben Bernanke is converting all the forest in the US into currency! The Gold system having failed, most Central Bank heads are printing too much of currency. Thankfully they cannot create gold.

4. Huge supply and demand gap: India and China will continue to buy gold, as will many other users!

5. Interest rates are more likely to decline, than rise, internationally, adjusted to inflation.

Tomorrow I will give you at least 5 convincing reasons not to buy gold.

Gold as a hedge in your portfolio works, but works over a very long period of time. If you buy gold because it has been going up it would be a wrong reason to buy. However, the fact is, it may still go up – but please stop expecting to get 36% CAGR, that will not happen, for sure.

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First of all most of the people I meet today invest far, far more in a year than the max possible amount of Rs. 70,000 in a PPF account. If you do invest in PPF – say 70,000 in 4 accounts, you have Rs. 2.8 Lakhs invested over a long period of time, your risk is high. If this is a significant portion of your portfolio re-consider your portfolio allocation.

Secondly in a growing economy inflation is a real danger – and most people do not understand this risk. Why people do not understand this risk is of course innumeracy. It takes a complicated mind to understand simple things like compounding (inflation is negative compounding). If inflation stays at an average of 10% you are losing 2% per annum on your contribution to ppf alone!

Though strictly speaking there is not too much to worry about a soverign default, there is a serious risk that an ambitious finance minister will delay the return of your money. Let us say P Chidambaram decides to pay you in 10 instalments – yes alongwith interest, but…

So sorry for being a party pooper. If you have a 16 year view (or 20) put your money in a plan with say 90% of the money in equities and 10% in debt. Rebalance every 3-4 years. Surely you will outperform a PPf.

You can reach me at pvsubramanyam@gmail.com.

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One senior citizen I know gets bullied by her bank RM so she “invests” in instruments he chooses. His branch is right across the city and she spends Rs. 300 on a call taxi everytime she visits the bank. The bank RM has the temerity to tell her – you will not understand TDS so please get somebody along! When she took another senior citizen, he was also told the same thing. Never mind he is a retired Vice-President of a large family group who coolly sent an email to his bank chairman emeritus (who by the way was a family friend). The chairman pleaded inability to tame the “young turks”.

Let us remember one thing – whether you are a man or a woman we as a country are extremely senior citizen RUDE. Whether it is bankers, telephone companies, electricity companies – they behave very, very rudely with senior citizens. I wish I had the energy to start a movement for them like dignity foundation.

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My logic was – if you do not know the downside, any business is too risky, is it not?

The most important part of any business is to know the risk, quantify it, find the price for transferring it and then going about doing the business. If you cannot quantify the risk, the risk is too much.

Like Warren Buffet says risk comes from not knowing what you are doing. That is risk.

So what do I do when people ask me this simple question? I tell them the story of Yudhishtir from Mahabharat. He was a super man in honesty and behavior. However, even he could not control himself in a gambling den, so as simple, normal human beings we are doomed, are we not?!!

So I tell the people, I do not know how to increase your profits in speculation, but I know how to reduce your losses in speculation. In fact I can reduce your speculation losses to NIL.

Simple, do not speculate. Surely I cannot increase your profits, but I can reduce your losses dramatically. QED.

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Remember the best money managers (no not a businessman like Warren Buffet) have done well by protecting the downside in their clients portfolios.

I sold Tata power, L&T, Hdfc not because these were bad companies but they had got ahead of their fair valuations – and by a mile. I was proved right in L&T and Hdfc (they are down more than 20% of my selling price) but I am not much in the money in case of Tata Power.

I have no clue as to where the market is headed – I have a “Technical Report” predicting a Sensex of 9800 and another report predicting 9000. I do not know whether this will happen. However I am convinced that there is enough alpha (or how a fund can outperform an index) and some smart managers can capture that.

You could be smart and continue your SIPs (like I am doing) or be foolish enough to stop the SIP. However, if the market stays down for say 4 years your stomach will be tested. For most investment returns IQ necessary is less than 100. However, in real life IQ above 150, harms your investment returns.

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