The story goes that many years back, Scott Adams, the creator of the Dilbert comic strip, decided to write a book on personal finance. But soon he had a problem, and a major one at that. As he writes in Dilbert and the Way of the Weasel: “I could describe everything that a young first-time investor needs to know on one page. No one wants to buy a one-page book even if that page is well written.”
Actually, Adams had cut through the noise around personal finance and summarized everything that needs to be done in exactly 87 words, and all of it was very straightforward. Pay off your credit-card dues. Buy a house if you want to live in it and can afford one. Get a term life insurance if your family is dependent on you. Maximize your provident/pension fund investments. Keep six months of emergency funds. And whatever remains after this, invest in index mutual funds. Make a will. And so on. One more basic rule that can be added to this mix is don’t put all your eggs in one basket. Diversify between and across asset classes.
The things that one needs to do to manage one’s personal finance are basically simple. The question is: Why do most of us not get around to doing it?
Take the case of new investors who have ventured into the stock market since early 2020. The number of demat accounts as of end-March 2021 stood at 55.1 million, 40% more than the 39.3 million accounts that had existed as of end-December 2019.
Or take the case of Bitcoin and other cryptocurrencies, which have become a fairly popular way of investing over the last year-and-a-half. Industry estimates suggest that there are currently 10-15 million crypto investors in India.
These new investors, both in stocks and cryptos, are young and are mostly investing money for the first time. Anecdotal evidence tells us that many of these youngsters have bet all their money on stocks and cryptos. When prices are going up, this looks very good, but the moment they fall, losses start accumulating.
Which is why it is important to have some money in bank deposits as well, despite the fact that the rate of inflation is greater than the interest that these deposits pay. This is simply because return of capital is more important than return on capital. That is how a savings pot grows over a sustained period. Just riding your luck is not personal finance.
Nevertheless, things like bank deposits, emergency funds, etc., sound very boring. They don’t bring the daily excitement and adrenaline rush that investing in stocks and cryptos possibly deliver. Plus, there is nothing to do once you have invested money in a deposit or have an emergency fund ready, or have a systematic investment plan (SIP) for a mutual fund going. Many investors crave action on a regular basis, doing things which are totally wrong from the personal finance point of view.
This is how it looks from the perspective of investors. But there is a problem from what we can call the ‘supply side’ of personal finance. The financial services industry is highly fragmented and each player is interested in selling its own rather than the right product. As Gillian Tett writes in Anthro Vision: How Anthropology Can Explain Business and Life in the context of how the industry hurt investors during the financial crisis of 2008: “The industry itself was very fragmented: different companies gave consumers different products, and different departments in the same institution served consumers too.”
This continues to be true. A stock brokerage sells you stocks. A mutual fund house wants you to buy mutual funds. An insurance company is typically interested in selling you investments with a dash of insurance. Most insurance salesmen don’t want to sell pure term insurance simply because premiums and thus their commissions are very low. Also, at least in an Indian context, it is apparently difficult to sell term insurance because people don’t like to be reminded of death.
What about banks? Your relationship manager at a bank will sell you stuff depending on what the business needs at that point of time and not what is appropriate for you. So, for example, if the bank’s loan growth is strong, you will likely be pushed towards putting your money in its fixed deposits. If its loan growth happens to be weak and the bank does not need deposits, you might be pushed towards buying investment masquerading as insurance from the insurance arm of the financial services group that the bank belongs to. If the group’s mutual fund is launching a new investment scheme, you will be pushed towards that.
Of course, what doesn’t help is that many people have absolutely no idea of what is right for them. And they get taken in by smooth-talking relationship managers at banks who are largely MBA-degree holders, many of whom can pfaff at the speed of thought.
There are boutique firms that offer a full range of services, but they are only available to individuals with extremely high net worths. No such mass-market service is available.
All this ensures that personal finance, despite Scott Adams’s observation, is usually little more than empty talk. Given this, a huge market gap continues to remain unfulfilled.
Vivek Kaul is the author of ‘Bad Money’.
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