A woman who plans is a woman in power by Priya Sunder

How is it that the market went up by 20%, and my portfolio rose by only 10%?” asked a slightly disgruntled client during our quarterly review. His wife interjected and said that returns in a short period were not as important if their overall life goals were being met comfortably. She was 100% right. I would have told her husband the exact same thing. Part of the couple’s portfolio had been moved to debt investments to fund their son’s education costs a year later, and was hence not exposed to the market. That explained the variance in the market return versus the portfolio return.

Right there, in the middle of this small episode, lay an epiphanic, an a-ha moment for me. I am generally not in favour of gender stereotyping, but I find that women ‘get’ goal-based planning more intuitively than men. Some may argue that men look at financial planning from a numbers perspective and women approach it from a holistic perspective, both of which are important. A good financial planner blends both to create a plan that is realistic in terms of risk and return, and robust enough to meet the important milestones in life.

Goal planning is not about whether your portfolio has outperformed the Sensex each month or how your investments have grown from day to day. It’s not about whether your investments performed better or worse than your friend’s or neighbour’s (believe it or not, I hear this quite often). Markets go up and down every day, but your goals remain constant.

It is the job of an investment or fund manager to ensure that her portfolio beats the benchmark. It is the job of a financial planner or investment manager to ensure that her portfolio delivers growth for long-term goals and safety for short-term goals. If a goal such as children’s education is coming up soon, it would be wrong to remain invested in equity. If the markets crash shortly before she needs the money, an important, non-negotiable goal will get compromised.

Goal planning is all about you and what works for you. It’s an inward-looking plan. A good goal-based plan would be one where your portfolio may not perform well in a quarter or a year or maybe even a few years, but if your goal is 10 years away it will be structured to meet this goal in a forecast-able, predictable manner. Think of goal-based planning as an outfit tailored to fit your needs. If the outfit is too tight, you will struggle to meet your goals. If too large, you are not utilizing your assets optimally.

All plans are based on certain assumptions. A goal-based approach understands what you want from your money and then creates the right portfolio to meet those needs. It factors the impact of income, inflation, taxes, safety, growth, expenses, market, and economic scenarios into your portfolio. Yes, it’s true that sometimes those assumptions or predictions may prove incorrect, but at least you have a greater likelihood of creating the assets to meet your goal than if you approached it in an unplanned manner. If you are an ad hoc investor, you are motivated by past returns, are driven by the current wave of greed or fear, or are acting on ‘expert tips’ while buying or selling assets. If gold or equity has done well in the past few years, you will be tempted to invest in that asset regardless of how expensive it is. This is the main reason why many have burnt their fingers investing in assets with volatile returns.

Sometimes, inertia or the lack of knowledge may keep you locked in assets such as gold or real estate, leaving you with tight or no liquidity at all. Or, you may continue to remain invested in tax inefficient, low-return investments like fixed deposits or savings accounts simply because you may not know any better.

Coming back to the issue of women and goal planning. A woman generally has natural instincts and inborn traits that are ideal for goal-based planning. Her risk-averse nature prevents her from indulging in speculative transactions. Her innate nurturing temperament ensures that some money is always put away for contingencies, so unforeseen circumstances don’t rock her family’s boat too much. Her controlled approach to money is not driven by short-term returns. Rather, it is motivated by the desire to meet the goal with certainty and comfort. She is more likely to invest in long-term investments that offer steady and predictable returns.

Women also tend to be emotionally attached to their goals. Whether it’s a long-term goal like retirement or a short-term, extravagant goal like saving up for a European vacation; the end is what matters and they trust the plan to take care of the means to fund the end. As a result, the commitment to the plan doesn’t waver in the face of market corrections. Goal planning is more important for women because the odds are heavily stacked against them. Like in most countries, there is a pay gap in India too, where women often earn significantly lesser than men for the same job. Women also live longer, incur higher healthcare expenses and take frequent breaks from work for childbirth or care giving. If she returns to the workforce, she may not draw her earlier income. Hence, her savings and investments are compromised. Even forced savings or healthcare benefits such as provident fund, superannuation and health insurance come to a halt with career breaks. It is only a structured plan that will help her prioritize her needs and ensure her goals are met.

In my opinion, goal-based investing is the only way to go. Because achieving your financial goals is the main reason why you should invest. Because it gives you the power to live life on your terms. Because when it comes to women, it’s not only about closing the gender gap, it’s also about closing the investing gap.

Priya Sunder is director and co-founder of PeakAlpha Investments.