And so the New Year begins with firm resolutions and high hopes. A client calls. They wish to buy land. They ask us to tell them the state of their investments.
Then they ask if they may stop SIPs and pull out some funds to buy land. So I explain the pros and cons of doing so to them.
As I strive to understand the reasons they wish to invest in land, I also make them aware – remind them – of their broader life vision, the goals that are close to their heart, the bigger picture, their values, etc.
In this case, it turns out that the client is sitting on liquid funds. They think the money is not doing much. It’s idling in the bank, so they want to put this money into an investment in the land. Oh, and they are risk-averse to the idea of employing the idling money for equity investments.
The lesson to be taken from this unfinished story is that it is essential to do right with your money than make arbitrary decisions based on your assumptions or on what others are doing. A wrong decision can cost you a lot more than investments that deliver lower returns.
If the client invests in land, take upon a loan, puts the liquid funds into an illiquid asset like land, it could lead to unexpectedly compromised long-term goals.
If the land value doesn’t appreciate at a desired, expected rate, repaying the loan taken to buy the land becomes a problem.
A simple calculation reveals that at the current cost of the loan (8%), plus the opportunity cost for the down payment (7-8 %), a piece of purchased land must appreciate more than 10% to make the land investment, a sound one.
Some people don’t like to invest in Bank FDs these days, for the rates are only 5%. But if you are risk-averse, make no mistake, taking that 5% return is much more beneficial than blocking your funds in a risky investment with uncertain outcomes.
Then there are cases where folks buy an insurance policy even though they don’t need it. Others invest in property for the rental income they may derive from it without carefully considering the possibility that the same set of funds can be invested in avenues that deliver even safer returns.
Financial decisions, like all decisions, have consequences. Bad financial choices do more than expected harm. Money is a tool to provide for life’s needs and desires; when you sink it into assets that fail to perform faithfully, you sacrifice a part of your dream life.
Let your investment decisions be guided by your dreams, vision, and values. It’s essential to give meaning to money to derive optimal satisfaction from it. Doing less wrong or not doing anything with money is better than getting into complex investments on a whim or because others are. That’s just herd mentality.