My takeaway from this year’s budget

Quite a few people are losing their heads due to the taxation change. I’ll admit that I am also in some kind of a despair due to my old debt funds losing indexation all of a sudden.

I suppose this is proof that you need to emotionally stable to succeed in investing. (Or anything in life, for that matter.)

Keep a clear head; learn the new rules; change your strategy if necessary. Keep marching towards your goals. Maybe that’s the lesson I need to learn from the taxation changes introduced by this year’s budget.

Suffering from success

I am sure “suffering from success” sounds bizarre, if not stupid. But I think it is a real thing. Here are a few examples that I have come across.

1. Money management

For the past few years, I have been optimising money management. Different ways of managing different expenses, different spreadsheets to track expenses, income, taxes, investments, etc. Whenever I encountered some unsolved problem, I tweaked my processes and tooling.

Earlier, a significant chunk of my energy went into thinking about money and worrying if I had enough money. Then I started devoting a similar amount of energy in tweaking my processes and creating tools and spreadsheets.

Now I am at a phase where I don’t have to worry about money too much. My regular data recording and review processes don’t take more than a few minutes. I actually have free time… except I don’t know how to use that time. It’s a good problem to have for sure, but I am not prepared for this. If I don’t figure out how to use the extra time, I’ll likely become a sad person just scrolling through social media aimlessly.

2. Financial independence

There is a craze in some circles about financial independence. People even talk about how much they hate their current jobs and how amazing their lives will become once they have amassed enough wealth to be able to stop working.

But surprisingly, not everyone who retires early enjoys a peaceful life. Some live in a constant fear of running out of money. Some find it hard to keep themselves occupied and even go back to their old job (or a similar one).

What comes after success?

What’s common between these two examples? We look only at our immediate problems and solve them. Once they are solved, we are little prepared for what comes next.

I don’t think anyone can foresee these “second phase problems” and start to solve them ahead of time. That’s likely not possible, and likely not necessary. Maybe what we need is an open mind. Not getting too stuck in our routines that they leave us feeling empty when those routines are not necessary anymore. When we feel empty, we get addicted to something. I, for example, am likely on the verge of getting addicted to social media. Spending some energy in figuring out how to use my time better is in order now.

It’s funny. We see some problems and solve them. What do we get? More problems. Reminds me of this line from the movie Zorba the Greek: “Boss, life is trouble. Only death is not. To be alive is to undo your belt and look for trouble.” Maybe life is just an endeavor to keep looking for better and better problems.

Emergency fund: a good idea with a suboptimal name

Shakespeare famously wrote,

What’s in a name? That which we call a rose
By any other name would smell as sweet.

This may lead us to think that names don’t matter. But reading more lines surrounding these two gives us more context. Juliet starts by lamenting Romeo’s name, saying “O, be some other name!” Then she thinks and says the more popular “what’s in a name?” verses, and finally finishes off saying,

So Romeo would, were he not Romeo call’d,
Retain that dear perfection which he owes
Without that title.

Essentially, it’s a lover making peace with a suboptimal name given to her man. Juliet knows what kind of a person Romeo is, so she decides to ignore the name and look past it.

However, good names can be of a huge help when learning about new ideas and techniques. This post is the story of how I got thrown off by the name ‘emergency fund’. That name, emergency fund, is misleading.

image via Peakpx

You see, an emergency is a high bar. I am of the opinion that real emergencies are rare in life. A typical person may have half a dozen emergencies in their lifetime. I can think of 3 emergencies in my ~42 years of life. Of these 3, only one was solvable by money. So the idea of maintaining a liquid emergency corpus sounded bizarre to me.

If I am almost never going to need this money, I used to think, why not deploy it in equity and let it grow? Isn’t keeping this money liquid a wasted opportunity? I eventually made peace with maintaining a nonvolatile emergency corpus, but I never got comfortable with the name ‘emergency fund’. It sounded like an inaccurate description for what it is.

What would be a better name, then? I think something like ‘safety buffer’ is better. I like Safety Buffer because:

• It is surplus liquidity we maintain for navigating unforeseen circumstances. Calling it a ‘buffer’ makes it clear that we are allowed to use it as/when needed, even when we are not facing an emergency.
• The word ‘safety’ implies that we start to live dangerously if we deplete this corpus. Hence the need to replenish it every time after we dip into it.

So Safety Buffer is what I am going to call it when I think about it. You may not agree with this name; you don’t have to. But always maintain a sufficient cash buffer to help you navigate unforeseen challenges life may throw at you.

Some thoughts on SPIVA reports

SPIVA reports are a popular data point that proponents of index investing use to show how actively managed portfolios are doomed to underperform the broader market. Without going into the active vs passive debate, I want to put forth a few concerns I have about SPIVA reports.

• Conflict of interest. SPIVA reports are published by S&P Global—a for-profit organisation that creates and maintains indices. When AMCs launch index funds tracking S&P indices, the AMCs pay S&P to get access to the index data.
      The more index investors are in the market, the more money S&P Global makes. Of course, S&P will show index funds in a positive light.
• Factor indices are conveniently excluded. In addition to market-cap weighted indices, S&P (and other index curators) also publishes factor indices. You know, the likes of Low Volatility, Alpha, ESG, etc indices. While they are dressed up like passive indices, they have a lot of resemblance to active portfolio construction.
      These indices can and do underperform the broader market regularly. But funds tracking such factor indices are not evaluated by SPIVA reports.

I am not asking anyone to ignore SPIVA reports. Nor am I calling S&P’s intentions bad. All I am saying is that index funds don’t become great just because SPIVA reports praise them year after year.

If an electric car maker publishes a report of how petrol/diesel cars are bad for us, how much trust/skepticism would you have on that report? A similar level of trust/skepticism is warranted for SPIVA reports too.

A fine line between acceptance and denial

I messed something up at work. This is a kind of mistake that I seem to keep repeating. It hasn’t been easy to forgive myself and move on. At one point, I started thinking if I should leave this job and move to a different team. “I am not anyway good at the skills needed for this role,” I thought, “so why not just find a different role?”

I have done this before—moving to a different role that aligns better with my existing skills. But in recent months, I have been thinking about the concept of “I”. In particular, the descriptions we give ourselves such as, “I am good at math,” “I am not very good with people,” etc. I have been trying to separate actions and behaviours from the person. Because of this, I almost immediately rejected my assumption/description that I was not great at my current job.

We change over time. I have gotten better at things that I was not very good at. I have started liking things that I used to dislike. It is only temporary that certain things are hard to do. I can get better if I tried. Understanding this has, thankfully, stopped the “I am bad at this” narrative in my own mind. However, now I am stuck at the next stop.

I agree this is just a skill. I agree I can get better at my current role. But why should I get better? Why not just take up tasks that don’t require so much effort?

What is preventing me from putting in the effort to get better? Hard to tell for sure, but 2 things come to my mind:

1. Fear of failure. In the past, I have shied away from new things because (unconsciously) I was afraid to fail. If I never try something, I never fail at it, right?
2. It feels futile. The “I don’t need to do this to prove my adequacy” narrative.

While reason #2 may sound like acceptance, it is, in fact, denial. Earnest attempts to improve requires accepting that there is room for improvement. Thinking “I am fine as I am” is denial. If I truly thought I was fine, I wouldn’t be brooding over the mistake I made at work.

Such denials are a hindrance for growth. But the good news is, awareness is (almost) all we need for shaking off such denials.