Why is it important to set Bulletproof finance and financial goals in a Recession in 2023

WHY DO WE REQUIRE FINANCIAL PLANNING ?

In today’s day, one of the most important segments of security is the security of finance which is just after the security of health, once the factor of health is cleared the major stream that comes into play is finance.

In our society especially in India hardly one talks about finance or non any groups discuss money planning, it is considered to be one of the most underrated skills in a general society where talking about money is actually focusing on the roots of evil.

But in today’s day money planning is one of the most important arts required by any individual living in any economic country, if we just move back to the last 10-20 years of India’s major society, we observe the major drawbacks and financial loopholes present in all family regarding finance.

The best advice anyone could have to give to you was to keep in fixed deposits, buy land, buy houses for trading purposes and not focus on long-term financial growth but some of the family segments used to focus on their financial planning, as a result, they are in wealthy conditions.

In the majority of sectors probably all over the world, there are people in the real estate business but with inheritance, the definition of wealth doesn’t get satisfied in that condition, as a result, we just do not move into a culture of finance which leads to an interruption in your financial journey.

The first and basic thing required for financial planning is the correct mindset, well if the mindset is correct and steady then it produces steady financial fluency.

HOW TO PROCEED WITH PLANNING?

If you are a regular researcher of stock and its analysis then there is no probability of having any problem since the confidence will be boosted and one can easily invest its entire funding to the stock market, but for a mere researcher it’s not possible to invest all its funds in the stock market since there generates a massive chance of high-risk growth.

Now the question comes up that not everyone can become a” WARREN BUFFET” or a perfect stock analyst, and the majority of the population does not have any time to read and write financial articles and statements but even they want financial security and financial freedom over the long period of time.

These categories of people who are consistently busy with their day-to-day life can use a famous process for their financial portfolio, commonly known as portfolio diversification.

But before all, we must remember that money itself is not the goal. our worth is not measured by the weight of our bank accounts but, rather by the weight of our souls. The path to money the places money can take us, the time and freedom and opportunity can bring these are what we must be really after.

” YOU CAN HAVE IT AL . JUST NOT ALL AT ONCE .”

~ OPRAH WINFREY

You can’t manage your health if you can’t measure it and the same goes for your finances, you can’t reach your financial dreams unless you know precisely how much it will take to get there. 

PORTFOLIO DIVERSIFICATION – 

the process where we do not keep all the investments in one basket or in one particular sector, for the safety of your capital and which provides a healthy return.

According to the survey that has been conducted in our country INDIA we generalize that the best portfolio diversification can be obtained by diversifying your investment in this regular pattern :

First, we need 30% of our investment funds in index funds for the long-term horizon, before entering the field of stock it’s important to proceed with the safety of capital.

Second, we need to invest 15% of our investment in favor of government bonds, which counters the volatility of stocks and helps to balance the portfolio also in the long term horizon.

Third, we need to invest 15% of our investment in GOLD which helps us to keep up with the accelerated inflation and helps to balance the portfolio.

Fourth, the remaining 40% of the investment funds must be allocated in stocks, which do generally have a bit high volatility but in order to counterbalance the portfolio we introduce the first three investment strategies.

THE INVESTING PRINCIPLE-

for an investor to invest in the stock market, the foremost thing that must be maintained is “temperament on investing” followed by some of the basic principles of investing, most importantly the very centric idea of investing is to keep the right concept of “margin of safety” since the more precise we get the right order concept the easier it will be for the valuation of stocks.

even if you are a beginner still it will be easier for you to understand the basic core of margin of safety starting with the fundamental analysis.

FUNDAMENTAL ANALYSIS-

EARNINGS:

earnings are profits in a business. earnings can be defined at various levels, (EBIT), (EBITDA), HISTORICAL EARNINGS, TRAILING EARNINGS, AND FORWARD EARNINGS.

• EBIT- these are earnings before interest and taxes, which are available to both equity and debt holders, generally equity holder gets the valuation of net profit and the debt holder gets the fixed interest return.
• EBITDA- These are earnings before interest tax depreciation and amortization, earnings that are available to a business to replace its assets over a period of time and to serve both equity and debt holders.
• HISTORICAL – earnings of previous years of a business are known as historical earnings.
• TRAILING- Earnings refer to the latest four quarters, calculated on a rolling basis.
• FORWARD EARNINGS- earnings of business calculated on future projections.

EARNINGS PER SHARE (EPS):

net profits of the company belong to the shareholders. earnings per share are the net profit divided by the number of shares. it indicates the amount of profit that the company has earned for every share it has issued.

EPS is calculated as:

EPS =( Net Profit/ Number Of Shares Outstanding), a higher EPS will show higher profitability and better earnings for the shareholders and will be preferred over shares of companies with lower EPS. EPS plays a huge role in choosing a share price.

let us take an example to understand the concept of EPS: a business with a net profit of 9 lakhs and outstanding shares share of 3 lakh, then the EPS would be Rs.3( Rs.9lakh/3lakh).

DIVIDEND PER SHARE (DPS):

the dividend is generally declared as a percentage of the face value of the shares. it is the portion of the profit that the company distributes amongst its shareholders. and if u want to understand more about the intrinsic of the stock market then please click here.

PRICE TO EARNING RATIO (PE RATIO)

price to earning ratio or the PE ratio measures the price that the market is willing to pay for the earnings of a company. PE is referred to as multiple of per rupee of earnings. it is used for trading purposes.

MARGIN OF SAFETY

whenever we calculate the valuation of a stock, then the margin of safety becomes much more evident when we apply it to the field of undervalued or bargain securities. the primary difference between the price on the one hand and indicated worth value on the other. this difference is known as the margin of safety.

we generally use a margin of safety for absorbing the effect of miscalculations or worse than any luck, since it depends upon the valuation factor of the buyer.

MARGIN OF SAFETY FOR FIXED VALUE INVESTMENTS

majority of investors recognize that the margin of safety is essential to choose a bond or a stock. here we generally declare the valuation of the fixed assets such as bonds to qualify over the investment grades.

the earning in the excess ability of bonds in past constitutes the margin of safety that is counted on the investor against loss in the future. generates the value of margin of safety for fixed bonds.

The bond investor does not expect future earnings to work out the same as in the past. the margin of safety is in essence the process and estimation of unnecessary and accurate calculations of the future.

MARGIN OF SAFETY IN STOCKS

stocks may be considered a choice because it enjoys a margin of safety as large as that of a good bond. if the purchases of stocks are made at the average level of the market over a span of years, the prices paid should carry with themselves assuring the adequate value margin of safety.

“HOWEVER THE RISK OF PAYING TOO HIGH A PRICE FOR GOOD QUALITY STOCKS, WHILE A REAL ONE, IS NOT THE CHIEF HAZARD CONFRONTING THE AVERAGE BUYER OF SECURITIES. OBSERVATION OVER MANY YEARS HAS TAUGHT US THAT THE CHIEF LOSSES TO INVESTORS COME FROM THE PURCHASE OF LOW-QUALITY SECURITIES AT TIMES OF FAVORABLE BUSINESS CONDITIONS“~ THE INTELLIGENT INVESTOR

DIFFERENCE BETWEEN DIVERSIFICATION AND MARGIN OF SAFETY

there is a close logical connection between the concept of margin of safety and the principle of diversification. one is correlative with the other. even with a margin in the investor’s favor, an individual security may work out badly. for the margin guarantees only that he has a better chance for profit than for loss not that is impossible.

but as the number of such commitments is increased the more certain it becomes that the aggregate of the profits will exceed the aggregate of the losses.

diversification in general is a conservative investment by accepting it so universally, investors are really demonstrating their acceptance of the margin safety principle.

FEAR OF RISK COMES INTO PLAY: we generally get different answers depending on whom, when and you ask, risk didn’t mean losing money, it meant making less money than someone else.

that many people generally fear bumping into somebody who was getting even richer even quicker by trading all categories of stocks

let us understand with the help of an example: imagine that you find a stock that you can grow at 10% a year even if the market only grows 5% annually. unfortunately, you are so enthusiastic that you pay too high a price, and the stock loses 50% of its value in the first year.

even if the stock generates double the market returns, it will take you more than 16 years to overtake the market simply because you paid too much at the outset.

Now, let us understand how the banks work.

WHY DO WE NEED BANKS? 

IN ORDER TO TRANSFER SUFFICIENT ALLOCATION OF RESOURCES FOR PRODUCTIVE ACTIVITIES IN THE ECONOMY, BANKS ARE ESSENTIAL TO THE SYSTEM.

THE BANKING SYSTEM

The banking system is a very basic core of any financial system of any economy with the help of which the economy of the nation gets supported and generates growth.

It ensures the capital growth of the economy and generates a bridge between a lender and borrower in a more specified and secured way, it accumulates money from the household (savings, fixed deposits ), and governments, and provides credit to the party who gets qualified for it. 

Like other countries, as in India, the Indian banking system is a multi-functional structure. The Reserve Bank Of India (RBI) is the regulator of the banking system and monetary authority, the primary function of RBI is to license banks and generate regulations for a strong and stable banking system.

It generates some very important functions of RBI that follows : 

• NOTE – ISSUING AUTHORITY – In any country across the world, all the central banks of individual countries have the authority to generate notes on their persuaded demand.[ likewise, the RBI also has the authority to print notes on its demand in order to stabilize the system ]
• PROVIDING NOTIFICATIONS: The RBI lends money as a government to other banks ( commercial banks) by generating certain rules and regulations for advancement. { for example, the RBI generates QUANTITATIVE TIGHTENING OR QUANTITATIVE EASING which fluctuates the REPO rate, and these rules must be followed by any other commercial banks ]
• CONTROLLER OF SYSTEM: The banks in any financial economy acts as controller of CREDIT and DEBT in the monetary system by generating changes in SLR (STATUTORY LIQUIDITY RATIO) and CRR ( CURRENCY RESERVE RATIO ) and other selective credit controls also regulate the foreign exchange market.

STATUTORY LIQUID RATIO (SLR) :

It is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold, or any other securities, it is basically the reserve requirement that the bank is expected to keep before offering credit to customers.

The same process occurs for the RBI, in order to maintain a uniform SLR of 25% of their total demand and time liabilities in India so that it maintains the liquidity in financial institutions operating in the country.

Let us understand the concept of SLR with the help of an example: If you deposit Rs.100/- in the bank, CRR will become 9% that is Rs.9/- and SLR is 11% that is Rs. 11/-, therefore the bank can use 100-11-9 = Rs.80 for all other credit purposes.

CURRENCY RESERVE RATIO (CSR) : 

It is also known as the cash reserve ratio, it is the percentage of deposits that commercial banks are required to keep as cash according to the directions of the central bank.

The cash balance that is to be maintained by scheduled banks with the rbi should not be less than 4% of the total NDTL (net demand and time liabilities ).

So, if there is an increase in the cash reserve ratio, then any commercial bank will have a very low lending capacity in terms of funds, hence the banks will ask more people to open deposits in their bank accounts, the bank also raises the interest rates and this step will discourage borrowers from applying for loans due to the increased interest rate.

TWO OTHER DEPARTMENTS OF BANKS IN INDIA : 

• EXIM BANK – which regulates and forecasts the growth of imports and exports activities in the country.
• NHB Bank – National Housing Bank, which regulates the housing sector of our economy. [ Any regular real estate investor is merely interested in this banking sector and does a huge amount of research in it ]

PRIMARY FUNCTION OF THE BANK 

The primary function of the banking system is to accept deposits and make credit available to those entities that qualify for it. the bank acts as the intermediary between those that have excess funds to invest and those entities that qualify for the credit. 

The entire credit evaluation is dependent upon the borrower’s ability to pay interest and returns on the principal.

The banks also provide a secure system for the financial transaction of their customers through different payment methods, now their extra productivity banks also provide extra services from third parties such as insurance, mutual fund, portfolio management service providers, and many others.

Therefore if you follow these strategies you can surely have a bullet proof finance and you can set expectations to achieve your financial goals.

And Lastly if YOU WANT TO GET CONSULTANCY REGARDING BUYING STOCKS OR GENERATING A PORTFOLIO DIVERSIFICATION THAN VISIT Bridgenile.Com