Khota Paisa

The (ill)Logic of Financial Experts

Posted in General by khotapaisa on August 6, 2009

Take 1 – Even if your wife is a house wife (non-earning member), you should insure her. The reason being, you will have to hire a cook and maybe a maid servant after her death. So, the amount you will spend on cook/maid, which you will need after wife’s death, should be the sum insured of your wife.

Take 2 – On valentine day, you should gift your fiancee with a demat account or fixed deposit or something on the same lines.
The first one is just out of this world. You can expect it only from a person who lives for money. The second one is more logical, but still i would rather not follow it. These are some of the advices right from the mouth of expert financial advisors. They regularly appear on TV, write in print media and give advice thru financial planning websites.
We must always remember that we make money to live. It is not the other way round. I would be happy to buy few grams of gold on my kid’s birthday every year. But I can’t be expected to pass it as “the birthday gift” to my kid. The kid expects something tangible as gift and that is natural. So it may be smart to buy gold on your kid’s birthday, but it will be equally dumb to gift the gold certificate to your kid as his/her birthday gift. And this is not all. As I read and see a lot on internet, TV etc, I come across many unjustifiable advices on financial planning.
Just the other day I was watching a program on insurance planning on a news channel. The expert was MD or some high level official from an insurance company. During the course of discussion, he said that you should take insurance in the tune 7-10 times your salary. This figure of 7-10 times is so commonly used that experts using this figure don’t even pause to think the rationale behind it. I have never come across the logic behind this assumption. I can, though tell you, that the 7-10 times rule will typically ensure that you are not underinsured. But this is just as a thumb rule which cannot (and should not) be followed in letters. Though there is nothing like over insurance, the insurance premium must be small enough to be affordable. And believe me, you will never find it affordable if you blindly follow the 7-10 times rule. So, the experts out there should keep in mind that they are not expected to give thumb rules to us. Many of us will blindly follow the thumb rules suggested by the experts. The experts ought to be specific in his/her advice. He/she should rather tell us that the insurance required by each individual depends on the debt, assets and many other variables. Similarly, another common advice which I have started seeing recently is about portfolio allocation. Experts are now suggesting keeping 10% your portfolio in cash. A few months back this 10% as cash would have been termed as idle money. So, what changed suddenly? Why do you need to keep 10% in cash? One possible reason given could be the economic downturn & the job insecurity. But then the job insecurity is only for private sector employees. And irrespective of the situation, one must have minimum 3 months equivalent of money in cash anyway. Experts are suggesting investing more in gold as it is expected to give more return. In reality, this whole concept of investing to get to get more and more return is the worst type of risk a common investor can take. The more you run after return, the more risky you investment becomes. Just continue with wherever you have invested. You need to reassess your investment periodically if your portfolio is not giving you the planned return. If it’s giving you the planned return, be happy and forget all the advices of the experts.

Take 2 – On valentine day, you should gift your fiancee with a demat account or fixed deposit or something on the same lines.
The first one is just out of this world. You can expect it only from a person who lives for money. The second one is more logical, but still i would rather not follow it. These are some of the advices right from the mouth of expert financial advisors. They regularly appear on TV, write in print media and give advice thru financial planning websites.
We must always remember that we make money to live. It is not the other way round. I would be happy to buy few grams of gold on my kid’s birthday every year. But I can’t be expected to pass it as “the birthday gift” to my kid. The kid expects something tangible as gift and that is natural. And this is not all. As I read and see a lot on internet, TV etc, I come across many unjustifiable advices on financial planning.
Just the other day I was watching a program on insurance planning on a news channel. The expert was MD or some high level official from an insurance company. During the course of discussion, he said that you should take insurance in the tune 7-10 times your salary. This figure of 7-10 times is so commonly used that experts using this figure don’t even pause to think the rationale behind it. I have never come across the logic behind this assumption. I can, though tell you, that the 7-10 times rule will typically ensure that you are not underinsured. But this is just as a thumb rule which cannot (and should not) be followed in letters. Though there is nothing like over insurance, the insurance premium must be small enough to be affordable. And believe me, you may not find it affordable if you blindly follow the 7-10 times rule. So, the experts out there should keep in mind that they are not expected to give thumb rules to us. He/she should rather tell us that the insurance required by each individual depends on the debt, assets and many other variables. Similarly, another common advice which I have started seeing recently is about portfolio allocation. Experts are now suggesting keeping 10% your portfolio in cash. A few months back this 10% as cash would have been termed as idle money. So, what changed suddenly? Why do you need to keep 10% in cash? One possible reason given could be the economic downturn & the job insecurity. But then the job insecurity is only for private sector employees. And irrespective of the situation, one must have minimum 3 months equivalent of money in cash anyway. In the same way, experts are suggesting investing more in gold as it is expected to give more return. In reality, this whole concept of investing to get to get more and more return is the worst type of risk a common investor can take. You need to reassess your investment periodically if your portfolio is not giving you the planned return. If it’s giving you the planned return, be happy and forget all the advices of the experts.

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4 Responses

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  1. AmitKher said, on August 10, 2009 at 12:38 pm

    7-10 times income: You need to know the meaning of thumb rule. The exact insurance that depends debt, assets and other variables comes from such a complex formula that the average person watching the TV program will not have a calculator advanced enough to be able to calculate this. Nor have enough MS excel skills to decipher the exact meaning. What use would such TV program be? Only for math PhDs ?

    10% cash: Nothing changed, but you don’t know the meaning of cash as used by financial experts. Learn ABC before listening to Shakespeare. Liquid funds / Liquid plus funds are called cash in investment parlance. It is not exactly idle money as mostly it matches inflation, or narrowly beats it.

    • khotapaisa said, on August 10, 2009 at 3:55 pm

      Well Amit,
      If you read & listen to financial contents, the 7-10 times insurance rule is openly used to suggest the insurance requirement of individual. Most of the times, it is not even mentioned what variables are required to calculate the insurance need. And the example I gave about the insurance executive is a real-life example. The 7-10 time rule was used to recommend the insurance need to a caller.
      As for the 10% cash, the meaning of cash in the world of finance is same for everybody. And knowing the meaning, I have written what I have. If you refer to discussions, programs just an year or so before, you would appreciate my view. NOBODY was suggesting keeping 10% in liquid(aka cash). And if you assuem that it should be understood , well then the common investor is not as smart. He/she needs to be specifically told the do’s & don’t. I remember discussion where an expert suggested that your cash/liquid sould not constitute more than 5% in any case. And now, 10% is the minimum recommended.

      Before suggesting anyone that he should know the ABC of finance, please be graceful enough to give him the benefit of doubt. I hope you are not one of the experts I talked about in the blog.

  2. AmitKher said, on August 10, 2009 at 6:09 pm

    As I said, the TV viewer would be unable to calculate. I hope financial planners / advisers calculate the insurance requirement using the full detailed method. But the TV show is not about the caller. It is about the audience, where by example of a single caller everybody is being instructed. If a formula is used there, the caller gets the perfect answer but the audience (who is the main target anyway) will not understand a thing. Useless TV show.

    I just want to point out that cash is not idle money. Cash keeps up with inflation to varying degrees. Idle money is currency notes in someone’s locker.

    I apologize if the same “expert” has changed his stance from 0% cash to 10% cash and you were pointing that out. Then that expert is just misguiding the people.

    • khotapaisa said, on August 10, 2009 at 6:19 pm

      That right. What I am arguing is that the expert should explicitly mention that this 7-10 value is not the final figure. It depends on your liabilities, assets etc. But they don’t do it. Point noted about “idle money”, I was only mentioning the recommendations or rather lack of it. Good to have argument about what I write.


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