Expert Interview financially integrated investments and personal finances

Suresh Madhavan of Financially Integrated About Investments and Personal Finances

Suresh Madhavan is the creator of Financially Integrated, a blog which provides insights, tips, and tools to help people manage their investments and personal finances. We recently spoke with Suresh about investing strategies, wealth management, and retirement planning.

Tell us a bit about your professional background. Why did you decide to start a blog?

I’ve been in and around the financial industry for all of my professional life. My various roles have required me to analyze a variety of complex financial decisions over a long period of time. I had a passion for finance and economics growing up. The thought of leveraging financial knowledge as a tool to earn my own financial independence really motivated me.

Starting the blog was an extension of that passion for finance. I view the blog as a collection of thoughts, learnings, and insights that I’m gathering on my journey to financial independence. I enjoy sharing these with others and getting other points of view. The blog is a perfect vehicle to do that.

OK… is it REALLY possible for personal finance to be not only “not boring” but even interesting and exciting?

I think so! Personal finance provides the tools to take charge of your life and fulfill your dreams. There are many people out there who are stuck in roles, jobs, and even careers that they don’t enjoy. In many of these cases, this is a result of financial need.

If you look at personal finance as providing you with the strategies to get you to financial independence, escape the rat race, and live out your dreams, then how can that be anything but exciting?

What are some of the investing strategies that you’ve embraced on your path to financial success?

I’ve embraced several different strategies on my investment journey so far. Each serves a different purpose.

Low-cost index investing in the S&P 500 is one of the core planks of my investment strategy. I invest in a low-cost index to provide the bedrock of my investment base. Returns tend to be fairly steady and predictable. The risk of permanent capital loss is negligible because of the large number of holdings within the index.

I layer on incremental layers of risk on top of the index investments that I have.

I have a selective portfolio of large-cap growth stocks that I’ve invested in which are experiencing strong growth, high cash flow generation, and strong returns on equity. This provides me with a bit of extra firepower to turbo charge my returns.

Additionally, I have a clutch of early stage small- and mid-cap stocks which are potentially super wealth creators because they are carving out new markets and disrupting incumbents. These businesses are also potentially much higher risk, because the likelihood of success is unknown.

Finally, I also pursue dividend growth investment strategies to generate a rising passive dividend income stream over time. My hope is to be able to enjoy the passive income from dividends to fund an early retirement without touching my capital.

How exactly does dividend investing differ from traditional investing in the market?

Dividend investing refers to investing in companies that specifically pay a dividend. Unlike traditional investment methods, this is a focus on the “bird in hand” rather than the “two birds in the bush.” It’s about focusing on the certainty of income from dividends, rather than speculating on future capital growth.

My focus is on dividend growth. I like companies that pay a rising dividend income stream. The benefits of investing in companies that can grow their dividends are fairly obvious. They tend to have better capital discipline, generate good cash flow, and be growing earnings. All of these factors make these businesses likely to survive and thrive.

Since debt is one of the biggest problems facing people today, could you provide a couple of tips or suggestions for tackling and paying down household debt?

Maintaining a lifestyle or an ethos of prioritizing spending on things that you truly want will help you avoid many of the pitfalls of debt. I’m happy to spend money on things, but I’ve prioritized unique experiences and travel as opposed to just hoarding stuff.

What’s important is going to vary from person to person; but whatever your priorities are, I think having a good budgeting process is integral to working out what you can afford and how you can pay it down.

Also, get rid of your most expensive debt first. That tends to be credit card debt and other forms of emergency financing.

The term “wealth management” sounds like something that applies only to the one percenters. But is it relevant to the typical household as well?

Wealth management is absolutely important to every household. The amount of wealth that you have is going to drive how comfortable you are in retirement. If you aren’t focused on cultivating it and managing it, then your retirement is going to be pretty bleak.

You can take either take the approach that you’ll “play it by ear” in retirement, or have a really disciplined, rigorous approach to managing and growing your wealth. I prefer a solid focus on wealth management to playing it by ear in retirement. With unexpected health costs and people living longer, an unplanned approach could make for a very uncomfortable retirement.

People who aren’t very market-savvy might be wary of instruments known as “alternative investments.” Should these people be concerned? Or can these investments be an integral part of a personal portfolio?

Alternative investments cover a really wide spectrum of things including commodities, collectibles, artworks, and investments in hedge funds or private equity. You really need to have a very good understanding of what the underlying characteristics are of what you are investing in – or you can end up in a world of pain.

Stocks and bonds generally have the advantage of good transparency. It’s relatively easy to understand the cash flow of the underlying businesses or instruments that they represent. For instance, you can work out that if McDonalds sells more burgers, then it’s likely to do well. If Coca-Cola sells more cans of Coke, then its profits will probably go up.

As we saw during the financial crisis, it’s much hard to understand more complex, exotic instruments like CDOs (Collateralized Debt Obligations) and be confident of what you are really investing in.

Finally, when it comes to retirement planning, how would the approach differ for a 25-year old as opposed to a 45-year old?

In my opinion, both should pursue very similar approaches: be aggressively focused on higher growth assets. People are living much longer these days, and retirement assets need to last far longer than what may have been the case 20 or 30 years ago. It’s important to grow as big a nest egg as possible before you hit your retirement. Growth instruments such as equities or property best help you do that.

The 25-year olds have the significant advantage of a longer time over which to compound their money. That means that they can afford to invest a little less each week or each month, and still be reasonably confident of a good outcome.

On the other hand, the 45-year olds need to be more aggressive in terms of their contributions toward retirement, with a shorter time horizon in which to compound their money.

The 25-year olds can afford to take a few more measured risks with their capital; like perhaps having a greater allocation of stocks that are earlier-stage, but which have the potential to be quite transformative. Finding the next Microsoft, Walmart, or Netflix can be transformative to their wealth creation, and having some money set aside for small cap stocks via an index could result in substantial long-term gains.

Personally, I’m taking a similar approach to my retirement as when I was 25. I’m still aggressively saving a substantial amount of disposable income for investment in growth assets. My approach has evolved and gotten better with time, but the pattern of saving and investing aggressively in growth assets remains the same.

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