Hope for the best. Prepare for the worst

Thanks to Srini. Your comment got me in mood again to write on Personal Finance after quite some time.

‘Hope for the best’ – we all do it, almost without any effort. When we buy a stock, we expect it to sky rocket out of everybody’s expectation. When we plan to get a car we expect the prices to fall down and freebies added by the sellers. No one needs to tell us that. We will always hope for the very best to happen to us whatever be the case.

There is nothing wrong with that attitude, after all positive thinking can help your mind and will create an energy within you to work all the more harder towards your financial goal. No one expect the share price to fall down when they had bought it. Part of it has to do with the ego of doing things correctly. That is where the danger lies. We try to be correct rather than being reasonable. We just can’t stand to see our friends smiling at us for having to sell our shares at a loss after all the knowledgeable lectures we gave them during the lunch about how to make a killing in the stock market.

So while everyone is happy when things goes as planned, there is absolute chaos when things break loose like what happened today to sensex after it lost 1112 points in a single trading session. ‘Prepare for the worst’ is the key. Many feel that when you prepare for the worst like taking a life insurance you actually are negative in your thoughts and you invite bad luck. But contrary to the belief, you are brilliant and are prepared to accept the fact that life can be unpredictable. The same goes with financial planning. Prepare yourself for the worst situation that might arise. For example when you buy shares of a company, never ever forget to put a stop loss order in place however confident you are about your selection. Likewise when you put all your money in one area whatever it might be, just give a thought as to what might happen if that loses terribly. So diversify.

What preparing for the worst does is to keep you alive financially when the worst happens to the financial world. You will live to tell the tale. It is like having a working parachute in place before sky diving. Like having safety boats in a ship. Even a Titanic might sink. You never know.

So be prepared and when the worst strikes, you will be able to take it else you will be one among the many slaughtered on the way. Another aspect is to keep the preparation as automated as possible without you having to intervene. This is because you might not have enough time to react and also because your blood might just freeze and you will not make any move but just watch panic stricken.

Have stop losses, diversify, nominate, take insurance (life, vehicle, home, loan, medical) as per and to the extent you need. Above all, what matters is that you make money, not that your lunch friends call you a stock market wizard.

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