When I landed in Chandigarh to go to a place called Jibhi (Himachal Pradesh), I got into a taxi and looked at Google Maps. I needed to know how much time I would take to reach. It said I would reach at 21.18 hours. Well, I got into the taxi—and I knew it was going to be a beautiful journey of 7 hours and 18 minutes.
Google Maps knew the route, the amount of traffic, etc. What it did not know was the speed at which the driver would drive, and the breaks that we would take during the journey. When you go to a Financial Planner and tell her about your goals, she tells you that if you invest Rs 8,000 a month for the next 36 years, you will have a corpus of `8 crore and you can retire in the year 2057.
Your planner does not know whether YOU will contribute regularly for the next 36 years. Your planner does not know what is the rate of return that the market will give (the speed at which you will drive).
We took a break, had lunch, stopped for tea, and reached at 22.25 hours. Not too bad, right?
Google could not have anticipated the traffic on the road, the sudden deterioration of the roads, traffic jams, the driver driving too slowly, me taking a 3-hour lunch break, right? Similarly when your planner tells you an 8k contribution and `8 crore corpus, it is an estimate—an approximation. Many things could go right or wrong in the Financial Journey. You could take a 3-year break, you may get one sensational 60 per cent return on your portfolio during one of those years. You could lose dramatically (1993), you may get scared and change your asset allocations.
She has no clue about YOUR behaviour, or about the behaviour of the market. Yet, we still use Google Maps, do we not? Yesterday (Sunday) on the journey from Jibhi to Chandigarh, we started the journey at 5 am. Again Google Maps told us we will reach at 13.30 hours—an about 8 and a half hour journey. We travelled real fast during the first leg of the journey—good driver, but no traffic. Google Maps now revised the time to 12.57 hours based on the journey so far. We then took a break for breakfast and decided to have lunch at Chandigarh. Suddenly, Google Maps went to predicting 14.35 hours. We actually reached at 14.27 hours.
Did I think Google Maps was wrong? Did I think it was inaccurate?
No. Of course not. I knew that Google was ONLY giving us a road map and guiding us during the journey. We did not err by taking a wrong turn or going in the wrong turn. Google Maps did not know the length of our breaks. It, of course, could not have predicted fresh traffic jams. We could have had a flat tyre (unplanned break) or a 2-hour breakfast break (partially unplanned).
This is exactly why we make a financial plan—a map. It gives us a sense of direction, assumed speed, etc. At the end of 36 years whether we reach Rs 8 crore, or reach it in 28 years or 42 years, is something we can’t predict now. However, we still need a map to keep us on course.
PV subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C 40 a day’