Financial freedom is a crucial objective for all individuals. Acquiring wealth is a central aspect of achieving this freedom and investing in quality stocks and bonds is the path to reach this goal at the earliest.
However, it is essential to remember that wealth creation is just a part of a larger purpose in life. As SEBI-registered investment managers, our responsibility involves not only growing wealth for our clients but also placing it within the larger context of life. We consider it our duty to ensure that our clients’ investments align with their overall life goals.
At a preliminary level, physical freedom (i.e., no slavery, bondage, or captivity) and freedom from disease (i.e., having good health) are basic. This is true for animals too. This story is about a real incident that occurred in the Kombaru sanctuary in Karnataka. A leopard was chasing the dog. The dog entered a toilet through a window. The leopard entered behind the dog, and both got stuck in the toilet as someone closed it. When the dog saw the leopard, he panicked and quietly sat in one corner – he had nowhere to go and didn’t even dare to bark.
Here’s the strange thing – even though the leopard was hungry and was chasing the dog, he did not eat the dog. He could have had dinner by tearing down the dog in one leap. But the two animals sat quietly in different corners of that small room for almost twelve hours. Eventually, the forest department arrived and captured the leopard using a tranquillizer dart.
Why didn’t the hungry leopard pounce on the dog, when it was so easy? According to wildlife researchers, wild animals are very sensitive to their freedom. As soon as they realize their liberty has been taken away, they can feel deep sorrow, so much so that they can forget their hunger. Their natural motivation to feed the stomach fades away. This shows that freedom and happiness are connected not only to humans but also to animals.
The same goes for health and finances, i.e., freedom from disease and financial freedom. These two freedoms allow one to perform to one’s full potential. Once financial freedom is attained, one can then aspire to spiritual freedom. Why is this called freedom? Because it allows one to escape the ‘twin impostors’ of success and failure, pleasure and sorrow. This is the ultimate goal and results in lasting happiness (or sat-chit-ananda), as our scriptures say.
A person keen on “Moksha” (the classic Sanskrit word for spiritual freedom) can eagerly pursue the techniques offered by the philosophy of their choice, such as Samkhya, Yoga, or Vedanta. This is similar to someone keen on “financial freedom/well-being” adopting various investment approaches to realize their goals. The Samkhya Philosophy correlates very well with such approaches in the area of investments and wealth management. We will draw upon some of the salient aspects of Samkhya and compare these approaches focusing on the Three Gunas. In another post, we will explore the Prakruthi – Purusha system of Samkhya in more detail.
The first principle of any investment is to understand the risk appetite (i.e., know about one’s own nature and personal situation) before embarking on any investment. For instance, a retired person may not want to put all her savings into high-risk assets like small caps or cryptocurrencies.
The second principle is to understand what the requirements are: liquidity for regular expenses for a few years; money for near-term goals, which is safety; and finally, future goals such as retirement, which would need growth. These three can be called LSG Needs. Though these 3 do not directly correspond one-on-one, it brings us to the three Gunas first enunciated by the Samkhya philosophers, which are Sattva, Rajas and Tamas. These qualities are present in each of us but to differing degrees.
This is an inactive, or inertial, condition. A vast majority of people invest their hard-earned cash in different fixed-income products. These are “savings” and not “investments,” since savings are done with the goal of protecting capital, whereas investments are done with the goal of growing capital. If you account for inflation and taxes, savings in fixed-income products don’t produce a significant real rate of return; as a result, one’s assets are in a default state. This does not mean that one should avoid ‘safe’ assets completely; we just need to moderate their allocation and ensure enough is set aside for their liquidity needs and Safety needs.
The aggressive Guna known as Rajas is full of activity and ambition. This is common among active stock traders, or those expecting very high returns on their investments keeping their money active and moving all the time. They are “trading” rather than “investing” because they wish to make a quick buck in the short term, often in leveraged products like intraday, futures and options. They do not rely much on the analysis of a company’s fundamentals or focus on making long-term investments to build wealth.
Here also, one must not avoid risky assets completely. Investors need to moderate their allocation to large-cap, mid-cap, and small-cap stocks based on their risk profile. Because inflation is such a Tamasic force, the only way to combat it is to increase Rajas and invest adequate amounts in good quality stocks. That alone can keep the nest egg adequate for long-term goals such as retirement or a child’s education.
The Guna of Sattva balances the traits of Rajas and Tamas and is the most desirable state for investing. Investors with this Guna can build a well-diversified portfolio that balances growth and safety, based on their objectives and risk profile. This allows them to invest, not just save, and to focus on stocks with solid underlying fundamentals, not just trade.
It’s a well-known fact that 99% of traders do not make money. On the other hand, a portfolio imbued with Sattva can lead to more profitable investments by finding the right balance between liquidity, safety, and growth. Additionally, Sattva is associated with qualities like contentment (Santosha), ensuring that wealth is seen not as an end goal, but as a means to a larger purpose in life.
In conclusion, building an investment portfolio is crucial for financial freedom. The foundation of a successful portfolio lies in a deep understanding of one’s risk appetite and tolerance and aligning this with the balance of one’s Tri-Gunas.
It is imperative to balance wealth creation with an increase in discrimination of the right knowledge (Viveka) and an unwavering commitment to core attributes such as Santosha (contentment). This will provide a solid foundation for staying on the path towards wealth creation and financial freedom.
By building a portfolio that is based on these principles, individuals can ensure that their investments align with their overall life goals and help them achieve financial stability and freedom in the long run.
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