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What did he know? The magic of moderation in life, balance.

For a new series of interactive videos, I met with a few experts from the financial services arena and chatted with them about their own experience with money. How they manage their personal finances, how they feel about money and their conscious dealings with money. While all of them had varied experiences, the one thing that tied them in, that brought them home with their money relationship was common.

This common factor may sound boring and cliched and conservative, but its so important that even the most aware financial services professional understand its worth and imbibe its discipline in their money lives.

Do you want to know what it is?

It’s two words, when used separately they may or may be relevant to what we are saying here. But when used together, its powerful. You have heard it before and when you read it now, you will probably think – I know that, what’s the big deal. But when you honestly apply this factor, you will find that it challenges your natural propensity towards money.

The two words – Asset AllocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... More. It means balance.

Simple enough, not really.

The balance keeps us going for longer

Some of us are risk takers and some of us like the steady state. However, overdo any one of these when it comes to your personal finances and you’ll be in trouble.

Ever tried standing on one foot, extending the other leg up, bending it at the knee and holding that pose? Or even what my children call, tree pose in yoga, Vrksasana? You will feel your body adjusting the balance and trying to keep you standing up straight. Why is it important to find this balance? It helps build your lower body strength and muscles, resulting in good posture and ability of your legs to effortlessly carry the rest of your body around for as long as you live.

Now think about building this balance in your investments.

If you rely too much on just one foot, then the balance is not possible, it comes from strengthening all parts. Have a portion of steady income generating assets or securities like bonds and deposits. At the same time, you need growth assetsGrowth assets as against fixed return assets are those which grow your capital or principle investment. The most common forms of growth assets are equity stocks and property. Investing in equity stocks means you buy a portion of the underlying... More like equity for long term wealth creation.

While the steady income assets, keep the income cushioned in difficult economic cycles, it’s the wealth generating equity assets which will deliver performance to ensure your retirement years, when regular income inflow stops, are well taken care of.

Biases hold us back

In theory, balance sounds good and easy enough. In real life, situations and biases hold us back. It takes a lot of conviction and courage to implement asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... More than what it takes to simply read or write about it.

You may have stock options from the company you work at, valued at market price, these can become a disproportionate part of your investments. You may have bought the home you desired for so many years, once again, valued at market price, the asset can become a disproportionate part of your net worth; in many cases the leverage taken to buy the house can also become a huge liability.

Alternatively, you might be putting aside most of your surplus in fixed deposits, just like your dad did.

The perils of having lopsided allocation will not present themselves on an ordinary day, rather show up in times of distress.

What happens if the organisation you work for comes under the corporate governance scanner or undergoes revenue fall due to technology led demand destruction; stock price fall can be much faster than the time you take to decide about your own stock options. Or what about the house you bought, if you now have to move overseas and are looking for liquidity by selling it but there is no buyer available, at least not at the price you are asking.

The fixed deposits will have failed you, when you are standing at the precipice of your retirement years waiting to jump into a comfortable lifestyle, but you realise that post tax and inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More over the years, the purchasing power of your money in deposits hasn’t increased at all.

These are the realities that many individuals face every day.

You can be wiser, learn from their experiences and try achieving that investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More balance right from the start.

1. If your income from your job or profession is volatile i.e. not a regular salary, then don’t take too much risk with your investments. Try to build in a higher proportion of regular income securities. Also, make sure to invest a higher proportion of any windfalls that you make.
2. When you are younger, it is easier to allocate more to higher risk – higher return growth assetsGrowth assets as against fixed return assets are those which grow your capital or principle investment. The most common forms of growth assets are equity stocks and property. Investing in equity stocks means you buy a portion of the underlying... More like equity given that time is on your side. As you approach the peak of your earnings years, shift some of those accumulated gains to steady return assets, especially if some of your non-negotiable goals are yet to be achieved.
3. Diversify, diversify diversify. No one asset or stock or mutual fund will perform the best at all times. You have to build a balance in assets, in stocks and managed funds to include enough which are appropriate for your requirements. If one crashes, your money life doesn’t come to an end because you diversified and others in the portfolio will take on the weight of delivering returns.
4. Lastly, start sooner than later. Let the experiences and mistakes of the earlier years help you in building the balance when it matters most. If you don’t have the experience, you will make mistakes, mistakes in picking assets, products and even advisors. There is nothing better than your own experience which teaches you how to manage the way forward. Early in your earning years, you have little to lose and mistakes get absorbed, in later years, mistakes can be punishments not just for you but for those who have now come to depend on your earnings and abilities.

So much money talk can get overwhelming and make you think that you are doing it all wrong. Again, there is no one who does it all right and no one who does it all wrong. Find your own balance, don’t copy another’s but understand the importance of balance.

No one has been able to guide us on balance better than Aristotle. Undoubtedly it applies to your financial life too – neither greed nor fear can bring you lasting success.

It is better to rise from life as from a banquet – neither thirsty nor drunken.

~Aristotle