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How should we invest in 2013? Notice I said how and not in what. Maybe it’s age. Or maybe it is just more emotional quotient. But I find myself throwing out the old textbook version of advice on money more often. The textbook version says that your life sits in a neat box. You wake up every morning and revisit your financial goals. You have this perfect asset allocation. And each time this changes, you rush to sell the winning class and buy the losing one. Classical financial planning falls into the same trap that classical economics found itself in—of assuming that we are rational economic agents who maximize utility and do not respond out of emotions of fear or greed. Of course, we’re messier in real life. Our money lives are chaotic and we take emotion-driven actions that come back to bite us more often than not.

If we move away from the tight financial planning theory, is there a minimum that we still need to do? If you’re lucky enough to have a good fee-for financial planner then don’t waste time reading this. But if you are a do-it-yourself investor who is “advised" by various sellers of financial products, you may need some ground rules. Have a general road map of where you are and where you see yourself going. If you get too stuck to the exact route you’re decided on, you may forget to appreciate the ride. But you do need a fix on what your money life is today and what you’d like it to be. Good intentions or raw worry is not going to move it.

The next fight comes with answering the question: what do I invest in? If you have an asset class preference—fixed deposits (FDs), land, gold, whatever—stay with it if moving out freaks you out and freezes you into inaction. The lure of real estate is so deep that financial planners find it difficult to move people out of the land-only mindset. Of course, the fact that land is the only remaining sink of large pools of black money makes real estate a lucky dip—if you’re able to time the market and choose correctly, you stand to make a pot—that entices the average investor. Once you make a conscious decision—I know FDs gives me a negative real return but I prefer 100% safety of my principal, I know real estate has very high transaction costs and is lumpy, I believe this is the best I can do with my money, I know gold does not throw off any interest of dividend, but I want to see, touch and hoard my money, never mind anything else—then don’t get swayed by sudden knee-jerk actions. If another investment begins to make sense, explore it, understand it and then begin making small investments, rather than breaking the FD and chasing the initial public offering or that stinky emu farm. Of course, once you begin thinking like this, you’ll reach the basic asset allocation and goal setting road map on your own.

The biggest iron gate that needs much more than good intentions to move is when it comes to actioning the desire to have a more orderly money life. This is one fence that you will have to jump over yourself. Your effort should be to find a way to put on autopilot the future stream of savings so that there is no fresh decision every six months on what to do with the lump sum. Whether it is a recurring deposit or a gold periodic payment plan, or even a periodic payment builder plan, try and organize the investment so that there is low recurring time and decision expenditure. Of course, for the same effort you could set up a systematic investment plan mutual fund portfolio that will leave you totally hands-free.

Mutual fund advisers who offer either purely theoretical goal-setting asset-allocation roads or offer the lure of high returns on funds they sell will find few clients. The tight financial planning model works for full service planners who are able to take over the entire relationship from the customer—from filing taxes to insurances and investments. But single product selling advisers will run into a wall when they try and push the traditional financial planning path. Smart advisers will work with the preferences of their customers, understanding their comfort levels and then gradually nudge towards a better spread of the asset pie.

End note: Ha! Always knew it but now a research paper proves it. A December 2012 paper titled IQ and Mutual Fund Choice (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2021957) concludes that high-IQ investors tend to own low-fee funds. Mint50, our curated list of 50 investment-worthy funds, looks at a low expense ratio, other things being the same, as a criterion for entry into the list.

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