The 2nd wealth management session

A discussion on risks that we face and how does the wealth management industry quantify the risk taking ability of a customer?

Prior to this session, the students had prepared and sent me a 20 year cash flow plan for an MBA couple - this was done in groups. I had picked a few of these cash flow plans – and specific groups got a chance to present their plans and as a class we critiqued the work. I am sharing one of the better plans in this blog –with permission from the students who made this.  Here is the link https://docs.google.com/spreadsheet/ccc?key=0AtBnUnyierp7dExnVkVRZV9LVE1MMGhrcmNpUXAxZFE

The key message that I wanted to convey was that anyone of my MBA students can become rich in the next 10-15 years - with smart investing; they can reach a stage where they “do not have to work for money”.  This is a mindset change – it does not come easily as most of us are from middle class back grounds and this 20 year financial plan proves to the students that they can also become rich – all they need to know is how to invest smartly.

This template can be used by my other readers as well – anyone can and should make a 20 year financial plan for himself/ herself –as I had said in my first session, “Failing to plan is planning to fail.”

Here is a small paragraph from my upcoming book (which is with my publishers right now) that explains this better -“As you plan for the next 20 years, you will get more clarity in your mind on your way forward – this financial planning exercise compels you to find a strategy to achieve your dreams – you will figure out the factors that are under your control that will help you achieve your dreams. You will meet and befriend people who will help you get closer to what you want. You will eventually reach your dreams earlier than your plans – the world will call it luck – but you will know that it is not just luck – subconsciously, you have been working on achieving your dreams and you have succeeded. Planning for long term and achieving will become a habit - a lifelong quest - and you will surely succeed in whatever you do.”

The second half of the session (90 mins) was used to talk about Risk as a concept.  We addressed two issues here –

• What are the types of risks and how does one mitigate these risks - Here we discussed the kind of risks that we face as individuals –  theft of our valuables, an accident, a heart attack, sudden death, unplanned hospitalisation, a customer suing a doctor for a mistaken surgery etc etc. We classified these risks, and discussed approaches to mitigating them. The message was that each one of us needs to be aware of the risks we face and that we must figure out ways of mitigating them.
• What is your risk taking ability and how do I link it to your asset allocation?  -Each one of us has a psychological risk tolerance level – some of us are Ok with higher risks and some of us are not. Plus the risk taking capacity is also defined by how much financial assets you have amassed – someone with 100 lacs assets can afford to risk Rs 10,000 in King fisher airlines stock right now – but someone with Rs 10,000 assets, should not think of taking that kind of risk with that stock. Needless to say, the kind of investments we should make should be in sync with both these factors –the psychological tolerance to risk and the financial capability to take risks – I shared with the class, how the wealth management industry does this –

The ppt for the session can be downloaded from here:

http://www.authorstream.com/Presentation/sgraja-1543947-session-2-risk-profiling-investment-planning-final/.