Pitfalls of sound retirement planning and how to avoid them

1. Buying insurance policies as investment products:

One of the most common mistakes made by many investors, this practice is borne out of ignorance as much as out of psychological factors such as risk aversion, familiarity with LIC as the only investment avenue known for a long time etc. An insurance policy by definition is meant to provide financial protection in case of death or disability. It is not meant to provide inflation beating returns as provided by equity asset class. A much better solution is to buy pure insurance products such as term insurance plans and combine these with investment in equity mutual fund. A term plan does not offer any money back or investment return and hence is extremely cheap, while an equity mutual fund offers inflation beating returns and historically has been the most effective wealth creating asset class.

2. Not allocating enough capital to equity asset class:

Again another common mistake arising out of fear of volatility and unfamiliarity with equity asset class. Many investors avoid equity exposure due to huge ups and downs that occur in equity markets over short to medium timeframes. What is important to note is that these fluctuations are simply borne out of collective behavioral biases of the market participants and do not necessarily reflect the underlying economic realities. When we talk of investing in equities, we are referring to investing in the underlying economy of the country, of which equity asset class is the barometer. Hence we are talking about investing in fundamentally strong companies and sectors and participate in their long term growth and not get affected by short term market over reactions.

3. Over investing in physical assets such as real estate and gold:

Another behavioral bias that leads to investors preferring to invest in physical assets believing them to be more secure and safe than equity. Even though historical returns over multiple decades has shown equities delivering far superior returns to either real estate or gold, risk aversion and ignorance leads many investors to still invest in these assets. A simple solution is consult a qualified financial advisor and prepare an asset allocation plan that helps an investor to create wealth through a diversified portfolio of financial assets consisting of equity and debt.

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