Deflation – Does it affect financial planning?

After years of rising prices and declining purchasing power, a new worry has sneaked into the minds of investors – The Deflation

Deflation – It means decline in price levels. It is when asset and consumer prices continue to fall. It occurs when inflation rate falls to below zero percent.

This may seem like a great thing to consumers. But it can be very dangerous situation. It also means there is no demand for goods. People start deferring their buying in anticipation of further price drops. As a result people tend to hoard cash instead of investing. If deflation stays for longer period, it means that a recession is already underway. As a result job loss, declining wages, decline in the value of your assets and your investment portfolio.

So, does it affect financial planning?
It is common that investors, who generally predict returns as high as 15% to 20% during good times become extremely pessimistic in their expectations during recession, and may indeed, significantly cut down on their investment levels.
In such a situation financial planning is of great help. Financial plans, when done in a proper manner during recession, can help investors achieve their targets. Planning should be neither too optimistic (as during bullish phase), nor too bleak (as during recession). Financial planning, especially during a deflationary phase, encompass of the following strategies:
a) Review of Investment Goal: Investors always have certain goals in their mind as they frame their financial plans. These goals also generally accompanied by distinct time-frames within which to achieve them. However, the ability to invest is adversely affected during a recessionary phase. In such a scenario, the initial investment plans might need to be revised and/or toned down according to the situation. When an economy experiences a decline, individual incomes are badly affected and hence, reducing their ability to invest. This results in individual debts being paid off less quickly than what might have been imagined initially. The time-frame required to achieve one’s investment goals may need to be extended during recession.
b) Reassessing of Risk Tolerance Levels: Based on how ready an investor is to take risks in order to gain higher returns can be classified as ‘risk-taker’, ‘risk-neutral’ or ‘risk-averse’. During recession, individuals need to accurately asses their risk-tolerance levels, and then choose the investment plans that would suit investor’s preferences.
c) Restructuring of an Individual Portfolio: After a review of investment goals, a restructuring of portfolios that are currently held is also important. It is said to invest in those companies whose products or services are not much affected by fall in demand. So, companies operating in health care, telecommunication and utilities like electricity distribution could be good stake to invest. Services of these companies will remain in demand even if the economy slows down. Investors also need to identify those companies where decline in prices lead to increase in demand for their products, prompting them to produce more value-added products with greater economies of scale. In this category, companies operating in sectors like snacks and beverages, health care, utilities and telecommunications can be included. Sector diversification is an effective strategy, since owning a mix of small-cap, mid-cap and large-cap stocks effectively lower one’s risk, while maintaining a high rate of return attached to a portfolio.
d) Review of Insurance and Estate Plans: During recessionary periods, portfolio income might go down. Consequently, one needs to expand their insurance plans. A thorough review of real estate plans is also necessary.
Hence, financial plans are of great importance during recession.

In Indian Context – Do we really worry about deflation? Does it have any impact on financial planning in India?
In India we don’t need to worry too much about deflation. As we have a very large number of consumer base (being a population of more than 100 crore) so there is always a demand and supply mismatch. Also, India still is a developing nation with very high growth potential in various sectors. In India we follow WPI (Wholesale Price Index) which is not correct for calculations as many items in the WPI is not used by consumers, whereas we should follow CPI (Consumer Price Index) which is hovering around 7.5 % to 8%. Unlike other developed nation we don’t have proper index which can give us correct inflation figure, which financial planners may follow for constructing a financial plan. In Indian context, we have seen deflation only in electronic goods item. In agricultural sector there is no deflation as demand is more than supply because of large population. Even items we regularly use are in great demand. There we don’t see prices to come down.

Hence, even if the WPI may come down below zero percentage still we have to take inflation for financial planning calculations.

CFP: The challenges, and the opportunities

Certified Financial Planner is the latest kid on the block, as far as the field of personal finance goes. Previously, disparate professsionals / non-professionals used to take care of an individual's financial needs. A CFP is an addition to the crowd, and offers a repackaged bunch of same ol' services, under a single roof.

As we now know, the financial services industry is undergoing a turmoil the world over, and hence the financial services firms have turned into reluctant and stingy employers. Job, as an option, hence is not as attractive as one would have expected. Hence, if one has to make the most of the 95 grands (could be less for others) spent on the Education Provider, without joining those very EPs as trainers, then to start on one's own is the best option available.

The challenges for a practicing CFP as I could comprehend, are manifold.

Today, CFPs are trying to create their own space in the mad, mad world of financial services. The old professionals or non-professionals are still there, and haven't faded away, as one would have expected them to. On the other hand, one keeps hearing rumours about some brokerage bringing some new course from abroad, in competition to CFP course. CFPs will have to get through this phase of intense competition and make their mark.

I am enlisting the present and prospective competitors that CFPs have in different modules of Financial Planning.

1) Insurance Planning: The regular insurance agents, are the most formidable competition.

2) Retirement Planning: Again, agents and distributors attached to big financial institutions take away most of the market share.

3) Investment Planning: Brokers and sub brokers, who double up as investment advisors and shell out free tips to their clients, who happily lap up whatever comes their way for free.

4) Tax Planning: Tax Consultants, CAs, many new websites giving taxpayers an option to file taxes online, the employers of many salaried, who file returns on their employee's behalf, and many other Toms, Dicks and Harrys who write the return, and file it, as it does not require a Chartered Accountant's signature.

These are the challenges that a CFP must overcome. Next time around let's discuss how we CFPs can overcome them.

Good Financial Planning by a CFP or a Self Investing?

During the professional career of CFP, is always bombarded with one standard question by every client is “Why should I pay for your fees when I can manage my own financial matters and in no need of any professionals help.”
The fact, client is unaware that he or she unable to estimate adequate life cover, retirement corpus etc. Also, fails to prioritize or quantify in monetary terms their financial goals of their life and to achieve them with less or no risk or may be taking some risk. This requires risk profiling of a client. That’s the reason most of them are unsuccessful to manage their funds actively even after enormous investment. Whereas, professionals can estimate all these with certain calculations, risk profiling of the client and much more to guide them for specific and fruitful investment for their future.
How self investment goes wrong? Because the client is unable to act when faces with complexity such as changing economic conditions of India as well as global, tax rates, laws etc. Another important aspect of wrong investment goes with biasness due to aggressive advertisement of the product by the companies. Generally, client goes with known brands and familiarity with the company. This result in a non-diversified portfolio, which may prove costly in the long run. Also, emergency fund which is vital but generally ignored by the client. Though we know any thing can happen anytime and one should always be prepared financially. But nothing is done.
There is always an exception. Similarly, there are few among many who could effectively manage their investments. But they do have to contribute lot of time and energy to manage their investments. For all these reasons a professional like CFP’s who are adequately trained for these matters. They have proper knowledge, resources and skill to effectively do this job. They are updated with latest information about the product, changing economic scenario, tax laws, etc.
Waiting for your comments...

Open Invitation To All Certified Financial Planners

Dear CFP's
This blog has been created to help CFP Aspirants as well as CFP Freshers to undertand and able to construct a financial plan and other related matters for a client .
I would request all CFP's to contribute your experiences in the field of financial planning in this blog so that it will be of great help to our new CFP holder's as well as student CFP's.
Why i created this blog? The question always arises in the back of my mind that why can't we (CFPs) have a common forum like CA's have, so that we can come together and share our knowledge and experience with other CFP's which in my view will be of great benefit to this field which is now at growing stage. Let's come together and make CFP's presence felt to others.