Today, the biggest investment risk is the ability to understand the “terms and conditions” and the “terminologies” associated with products that require an Einstein brain to decode. Thanks to the lack of time, the investor does not venture anymore after hearing or reading the ‘terms’ thinking it will invite a boring explanation of the facts. At this stage, the client enters into a transaction in “good faith” thinking that his interest is taken care of by the advisor. The investor or client gets into the transaction knowing little that the jargons are used to help protect the advisor or product from any fault of performance and are sometimes an escape route in case of bad delivery of performance. Though the use of jargons can never be completely avoided but has to be few, relevant and explainable which is important.
How does the investor learn to de-jargonize the conversation and financial contents so that he understands “Roses as Roses and Thorns as Thorns and not Roses? There are 2 ways to handle this issue. The first option is at the advisor level and the other at the Investor level. While any amount of cajoling at the advisor ends to use simple terms has not met with desired attention the best way is to help the investor realize how he needs to interpret the financial language. Since it is a case of Buyer’s beware! Let’s take the journey to the mysterious island of financial products to know how to de-mystify the products to know what you are buying.
Six simple steps towards the right decision making
Step 1: Know what you know
Now that brings to the forefront how and what needs to be understood about any product before investing. If you are looking to invest some money then you should be clear about certain things before you invest such as
- How long you can spare the money or what is your holding period?
- Do you need all or part money anytime before the completion of the term?
- What sought of risk you can take?
- What sought of purpose you have for that money when it matures?
If you can get your answer by yourselves (other than family members) it is the best procedure. If not, seek somebody who is not an investment advisor or someone who has no business interest to guide you (avoid conflict of interest while seeking help).
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The mirror does not hide anything!
Step 2: Don’t mix up an individual risk profile and investment opportunities in the market
Once you arrive at the 4 parameters, you can filter the products using your advisor’s help. The advisor should enter the conversation once you have decided upon the allocation parameters. Otherwise, the general tendency is that the product behaviors in markets are always confused while deciding on allocation. For e.g. if the equity market is doing well, everybody would advise investors to enter the market and influence the time horizon to be longer to invite participation. Whereas the product allocation and horizon should be strictly selected based on individual risk profile and nothing should be based on market conditions. There is a general tendency for these two parameters in collision course leading to a short-sighted approach to investment.
Though tiger and cat belong to the same family their food habits are not the same!
Step 3: Know what you don’t know
This is more an emotional quotient than a rational quotient. If the market downswing can rattle you and if portfolio carrying negative return for short to medium term can worry you then you need to be cautious on investment decision. ‘Return on Investment’ you can see and fail to understand from where it comes. But ‘risk’ you cannot see but you understand how it hurts after the event.
Knowing what you don’t know is much important than what you know. For e.g. you might be a regular investor in a particular FD of a company for a quite some time. You know that the promoter is genuine and had been prompt on service. But what you may not know could be what credit rating that the company enjoys right now?, How much net profit they made the last 5 years?. Do they have a good cash flow to service debt without delay etc? In the absence of such details, how far is your investment decision wise and better when you invest today?
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The past track record of service and existence is no comfort to assure that your current deposit will be returned unless you know the financial health of the company better. Who can give you the details? Where I can verify the information? Can I take those informed decision myself? Finally, do I need a service of well-informed advisor?
The policy of “What is not visible is not relevant” can be dangerous
Step 4: Know what your advisor knows
In the process of decision making, you may not have all the desired inputs. You need to seek the service of an advisor who can direct you well. How do you evaluate him? You need to know if he can bring in the desired inputs. Does he have the desired competency to handle such products and remain unbiased while sharing his opinion? If you can screw-gauge his talent then you will be able to make the right decisions. You may not be good at evaluating the schemes and products all by yourselves but you need to test-clear your advisor. This is critical as all your future plans and benefits that you may derive hinges on the Advisor’s 3C – Competency, Credibility, and Compassion.
Knowing your priest is more important than knowing your God
Step 5: Know what works for you
If all the steps from “What you need to know” to “What your advisor knows” are followed then the next step is to know “What works for you”. Some investment works for others and some may not. It is subject to the way people look at things and can vary based on how we react to a given situation. While markets behave the same way for all people for a given span of time, but how people react to it makes a lot of difference it terms of what they take home. For e.g. if during a 5-year investment in Equity, certain investor held it for full 5-year term giving them 15% compounded return per annum while someone who kept taking the investment and re-entering at a later date ended up getting only 10% per annum. When you put long-term money be sure you understand our request for clarity. You need to make a safe investment which means you need to invest where you can understand the risk and return without ambiguity. It does not mean that “safe avenues are a safe investment”. You need to ask more questions to seek clarity and then invest once you know your scenario. Ideally, it can take 3-4 days or possibly a week but not more than that. If you were to take more time than that it means you are still not ready for it.
You know it better than your doctor when it comes to your headache – “Crocin” or “Saridon”
Step 6: Golden Rule: Invest in what you understand
Investors should stick to the view of investing what they can understand and never should feel compelled to invest just because it was prompted by someone whom he knows well in spite of not knowing what the product is. If truly adopted the major worries such as “bad performance” and “not living up to expectations” can be avoided. If you are starting a product for the first time, let the sample also be smaller. If you cannot afford to invest in a small amount then do a simulation or virtual investment to understand if it is working for you and then go for the bigger stake. Invest simply! Stay compounded
Owe by Risk and own the Return!
Please note the word ‘jargon’ is a jargon which has the following meanings
- Special words or expressions that are used by a particular profession or group and are difficult for others to understand
- A form of language regarded as barbarous, debased, or hybrid
Sample of Financial Market Jargons
Elevated
mitigating
pass-through
patchy
soft patch
upside pressures
upward revision
suppressed inflation
inflation trajectory
risk-off
decelerated
tapering off
non-trivial risks
concerted
Monetized
Irrational exuberance
Remedy: The UK Government has recently banned the indiscriminate use of jargons in policy documents and Government announcement. Already a law firm in US Latham & Watkins has created a free downloadable iPhone app with over 750 jargon search called “The Book of Jargon – Corporate and Bank Finance”. We need something similar for our investors to interpret the advisor’s language.
This would help India as well especially to interpret Government of India, RBI, SEBI, Income Tax, Central Excise, Real Estate, Court, legal documents and a whole lot of businesses such as IT, Telecom, Hospitals, and client-facing service providers. May be somebody can create an App (Indian version) or an Anti-jargon software (something like Norton Anti-Virus!) into which if you import the readable content will replace all the jargons with simple words showing the highlighted replacement. As soon as the content is uploaded to the App or software it will give the count of Jargons and normal words to know the ratio of such usage. A comprehensive Jargon dictionary needs to be made that can help call “A Table a Table”.
Notes:
- This essay of 1630 words is written with 30 jargons
- Jargonaut means someone who uses jargon excessively