Saturday, October 24, 2015

3 Important Financial Lessons From the World's Richest Man

3 Important Financial Lessons From the World's Richest Man
1.  Diversification
One lesson investors could learn from Bill Gates is the importance of diversification. Despite what many people believe, most of Gates' wealth is not in the form of Microsoft(NASDAQ: MSFT) stock. In fact, since he's sold many shares over the years, Bill Gates isn't even Microsoft's single largest shareholder anymore.  Most of Gates' wealth is in his investment company, called Cascade Investment, LLC, whose portfolio looks more like that of Warren Buffett than what you might expect from a tech billionaire. Gates makes a wide variety of investments through Cascade, including stock and venture capital investments, but just a few of the biggest publicly traded ones that we know about include AutoNation, Canadian National Railway, Ecolab, Deere, Liberty Global, and Waste Management. Additionally, Gates owns a large chunk of Berkshire Hathaway stock, essentially expanding his portfolio to include all of Buffett's stock picks.  The point is that even if you make a lot of money from one investment, it's unwise to leave all your eggs in one basket -- doing so leaves your wealth extremely vulnerable. Because of Gates' smart diversification of his wealth, he isn't too dependent on the success of any one of his investments, including the company he famously founded.

2.  Long-term focus
You can learn a lot by listening to what successful people have to say, and Bill Gates is no exception. One of his statements sheds light on a concept critical for successful wealth-building: a long-term focus. In his 1996 book, The Road Ahead, he said, "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction."

The statement is telling, because in a variety of ways, Gates' company, Microsoft, significantly underestimated unfolding changes. The company was famously slow to see the value of the Internet, and it also lost ground being late to appreciate how rapidly the mobile world would grow, not to mention cloud computing and open-source software. Gates has clearly learned the lesson he imparts the hard way.

Gates's statement is instructive for investors in several ways. First, of course, it reminds us to not be short-sighted when it comes to companies we invest in or think about investing in. We should think critically and broadly about them and their futures, lest we be caught unaware when they don't keep up with change or position themselves well to capitalize on it.

We should also bring a long-term view to our investments' performances. Don't buy a stock expecting it to pop within a year or two, because anything can happen in the stock market over short periods. Do think about what kind of growth you might expect over the coming decade. Look for companies that aren't just mispriced slow-growers with a 25% upside in them, but ones that have great long-term growth potential, that can multiply your wealth many times over – over the long haul.

3.  Understanding why we want to make money

An important lesson investors can take away from Bill Gates' success is that Gates has a strong understanding of his long-term financial goals. He doesn't invest just to stay atop the Forbes Global 400; rather, he understands that money is a powerful tool that allows us to fulfill our dreams and aspirations.

In his case, Gates is passionate about making the world a better place through philanthropy via his Bill and Melinda Gates foundation. Though he needn't ever work another day in his life and could pretty much buy anything his heart desires, his portfolio decisions are based on what is best for the ultimate objective that leaves him feeling most fulfilled.

Understanding the reason we want to make money is important, because not only can it help us to live richer, happier lives, but it can also keep us from making foolish, short-term decisions that can result in a large permanent loss of capital.

For example, say you're 50 years old and investing to secure an income source for your retirement that's 15 years away. Your time horizon and goals mean that you probably want to avoid riskier stocks such as Tesla Motors or SolarCity in favor of more conservative blue-chip dividend names such as Kinder Morgan or ExxonMobil.

Most importantly, during times of market volatility, as we've recently seen, your long-term goal's emphasis on safe and growing income means you're less likely to panic and sell at a loss. Rather, the falling share prices and rising yields you can now obtain represent an even greater income stream in your golden years. 


Five tax things that will help you ensure financial freedom

  1. Invest according to your goals and not just to save tax
    One of the most important points when it comes to taxation is that there are several tax deductions that are available for individual when they invest in specific instruments. One of the most popular routes is the benefit of a deduction under Section 80C. Here investment in specified instruments like Employees Provident Fund, Public Provident Fund, National Savings Certificates, Senior Citizens Savings Scheme, Equity Linked Savings Scheme, Life Insurance premium etc is eligible for a deduction upto Rs 1.5 lakh a year. This is a golden opportunity for an individual to plan their goals and then ensure that the amounts are invested that would achieve the goals and at the same time save tax. Often this angle of combining goals and tax savings investment is missed out. People do not invest according to their goals which leads to a position where they struggle to complete the tax requirements and at the same time their goals remain unmet. This is something that needs to be avoided so that one investment can yield multiple benefits.
  2. Boost for retirement planning
    The biggest financial goal for every individual is to plan for their retirement and this requires a huge sum of money. It often takes decades to plan and invest for retirement and the challenge on this front is big. A little bit of attention to the tax aspect can ensure that there is little to worry about on this front too. There are instruments like the Public Provident Fund and the Employees Provident Fund which provide double benefits. On one hand the amount invested gives a deduction from the taxable income to the individual under Section 80C but even greater is the benefit that is received on the payout. The amount earned on these schemes as interest is tax free so this reduces a huge burden when this is earned or when this is received. This can help in ensuring that the goal of retirement planning is tackled and freedom from this tension is achieved for an individual.
  3. Medical expenses taken care of
    Protection of the family of an individual is a big part of the entire financial planning process. This is the reason why medical insurance is a must for every individual so that any medical expenses do not prove to be a financial burden that can devastate the finances of the individual. A look at the tax aspect can once again provide double benefits as the premium paid on medical insurance policies upto Rs 25,000 for individuals upto 60 years and Rs 30,000 for those above 60 years is available as a deduction under Section 80D. At the same time even preventive check up costs upto Rs 5,000 are covered. This should encourage people to get freedom from the worry of medical expenses as well as get a tax benefit in the process.
  4. Powering education
    Most parents are worried about the education of their children due to the high cost involved. This is an area that provides for an improved career and earnings prospect in life. There is however a large cost that can come for achieving as this has spiraled in the last few years this but some small tax steps can ease the situation for the individual. An education loan for the purpose of higher education will ensure that the financial aspect of the process is met but at the same time it will also give a tax benefit to the individual when the loan is repaid. The interest that is paid on the loan will be allowed as a deduction for 8 years. This will also remove worries about meeting the high education costs and making it affordable.
  5. Wealth creation
    Equity is the best asset class that can help in the process of wealth creation and this benefit can be multiplied by also ensuring that the tax benefits are taken with it. Equity oriented investments like shares and equity oriented mutual funds have double benefits as the dividends are tax free and at the same time long term capital gains is charged at zero per cent rate which also makes the gains tax free. This can be used for the necessary asset allocation and the tax benefit will ensure that the goal of wealth creation takes place without taxes eating into the effort leading to another area that provides financial freedom.