Making money is as easy as spending it!

Right from our childhood, we are taught that it is much easier to spend money than to earn money. While this is still substantially correct, there is a major shift happening. Thanks to the power of technology and tools for better risk management, it is possible to generate wealth with minimal risk. Gone are the days when you had to take mega risks to make big money. Today, you can do it with discipline and adequate planning. How to go about it? Here is an 8 step process to make earning money as easy as spending money.

8 steps to make earning money as easy as spending it…

1) Start with your goals in mind. Put your end in the beginning. Sounds ironic right, but that is the way investing should be! Remember what Archimedes said, “Give me a long enough lever and I can move this earth”. If you know the wealth you want to create and if you know how much you can invest, you can work out how to reach your wealth goal. Based on the goals and the returns that your investments can generate, you can decide about increasing your allocation, increasing your aggression or tempering your goals.

2) Reduce the role of manual intervention as much as possible. The more you get people to get involved in the advisory process the more will be the role of individual bias. People, by default, are conditioned by their environment and their experiences. When individuals advise, these biases get carried forward. That means you are not getting objective advise on your investments and that is likely to be sub-optimal.

3) Use the power of data, technology and analytics to the best of your ability. Today, access to mountains of useful data, the processing power to sift through the relevant data and to process solutions is much quicker. Use that to the hilt.

4) When you want to create wealth you do not need products but you need solutions. Let the smart sales rep not come and tell you why you should buy mutual funds or why you should buy an insurance policy. Rather, you need to figure what makes sense to your long term goals and to what extent. A solution is a set of products that are mixed and calibrated to help you reach your financial goals easily. The DIY approach can work better here.

5) You can enhance your returns with the smart use of big data. You have millions of product options and you just need one solution. Therefore, the solution has to be optimal. That means, it must be aimed at maximising returns for a given level of risk or minimising risk for a given level of risk. That kind of sifting can only be done through the use of big data and a high end robot that can cherry pick the products and create a viable basket for you to choose from.

6) After sifting through the big data, the next step is to find the fit. You know your goals, you know the products available in the market. The next step is to find the optimal mix. In financial planning, you always focus on minimising risk and diversifying the risk. The returns normally take care on their own. That is where algorithms come in handy. You have options from the algorithm and you can just select the best option.

7) Give a lot of importance to cost because that matters a lot when you evaluate net returns. Your equity fund may charge you 2.5% expense ratio while the index fund may charge you just 0.5%. If you consider returns net of costs then you may be better off in an index fund. Use the same logic for technology too. When you can get a much better product that is customised and robust with the help of technology then why not adopt it. You are also eliminating the entire human bias in the process.

8) The big advantage of going on your DIY approach is that you are insulated from mis-selling of products. Normally, the aggressive salesperson is more keen to push products than solutions. They look at product originators as their customers rather than the end users. That is where the mismatch comes. You do not want a ULIP or an endowment plan being thrust upon you for now fault of yours.

Let us clarify here that the idea is not to underplay the importance of prudence. It is still critical to create more savings and therefore more investments. The moral of the story is that you can actually use technology to minimise your risk and maximise returns.

This is backed by data so it is also reliable. The opportunities to create higher returns with the help of systematic investing are a lot more today due to the support of data and analytics. You can actually make the best of it!

(The writer is Head of Research and ARQ at Angel Broking)