A few days back I had done a story about risky financial behaviour.  I had said 1-6, so here are the another 6 – from 7 to 12.

I did not want to say here are 6 in a set of 22…’cause I wanted to leave it open ended..

7. Time diversification: You cannot pay your hotel bill with a 30 year Government of India bond. Nor can you save for your retirement in Government bonds if you are24 years of age. Your portfolio needs a time diversification too.

8. Not understanding the difference between the risk of inflation and the existence of volatility in the short run. Investing short term money in volatile asset class is so stupid that it is not funny. I know of people who invest in real estate – and create no other asset class. In a down turn, they are taken apart.

9. Investing in Ill liquid assets: Real estate by definition is ill-liquid. When the markets are down, you may not be in a mood to sell at the depressed prices. So fall in price, and freezing because you do not want to sell – impact is the same.

10. Investing in One company or One Buyer & One seller product – like investing in art! You are they buyer, the seller has to give you a 2 way quote. There is no great privilege in investing in a product managed by a bank – which has to give you the story – of why it is a great buy. At the same time he has to give a great sell story – to another client. He also has to make some money in between. It is tough.

11. Listening to old timers who do not adapt to newer times:  When inflation is high, it makes sense to borrow and buy a house. When inflation is low, it makes sense to grow your money in an equity mutual fund. So ‘sensibl advise’ during the 1990s may not be true in 2010. Even if the advice comes from your close family member!

12. Ignoring inflation in calculations: Easy to understand because we do it often. Even today I find 23 year olds thinking that they require Rs. 50 lakhs for retirement. They would actually requrie Rs. 20 crores. Understanding gap is called ‘inflation’

will continue this post….