Avoid Noise

Do you know what is the biggest hurdle or problem in wealth creation??

Is it money? Majority of the people say that they don’t have enough money to invest and so they can’t create wealth. We often tend to forget that every single penny saved or invested will help in wealth creation. So how can less money be a hurdle?

Is it knowledge? Several people feel that they don’t have enough information or knowledge as to where to invest. Well you don’t understand medicine but still you are alive is a proof that knowledge can be acquired or hired. So this can definitely not be the hurdle in wealth creation.

Is it time? Well first, it’s all about time management and secondly you don’t need to put loads of hours into this. A couple of hours every month is more than enough.

All the above mentioned, so called “perceived hurdles”, are more of distractions. However, even after overcoming them there is one big hurdle which most of us fail to overcome.

It’s the NOISE, the noise that surrounds us. And what is this Noise?

Noise is when a friend / colleague shares that he has received 50% returns in just 2 weeks by investing in stocks. Now, there are 2 ways one can react/respond to this.  One, believe him ( P.S. – No one tells how much they have lost or how much they actually invested, Rs.5,000 or Rs. 5,00,000) and stop existing SIPs and start investing in stocks on expert advice (TIPS), or, two, just ignore this noise and continue with your SIPs.

Noise is when markets correct for 4-5 days in a row and our so called experts start predicting it as bear phase. Again, you have two choices. First, listen to such experts who change their opinion every week and stop your SIPs or the other option is avoid this noise and continue with your investments.

Noise is when people who invest in bank FDs give “expert advice” on markets and risks associated with it. Again you have two choices. First, listen and second avoid.

In India you will find at least one or two Warren Buffet in every organization who will tell you which stock to invest in. Most of these self-acclaimed Buffets have never made money from the stock market and on the contrary have generally lost it. In the last 15-20 years, we have seen several ups and downs, scams, global issues etc., be it the Harshad Mehta phase, the Tech bubble or the Lehman Crisis, and the Indian stock market has survived all these events.

Smart people who avoided all the noise during such events and continued with their SIPs have made around 18-20% CAGR on their investments.

There are and will be many more global and domestic events in the future and with the unfolding of each of these events, you will have two choices, first listen to noise and second avoid noise and keep investing.

Remember, there are two types of investors, one who makes money and the other who creates noise.

68 years of Independence

First, let me wish all of you a very Happy Independence Day. Today we all are celebrating 69 years of Independence. It is and will always remain a proud moment for all of us. After lots of sacrifice and efforts we finally achieved our Independence.

Isn’t it nice to be free and independent? How will you feel if you don’t have freedom to spend the way you want, go out when you want or buy stuff when you want. Its not going to be an easy affair.

But, how many of us actually want to be independent, I mean financially independent at the age of 60?  And even if we want, are we actually planning for it?

After spending 40-45 years of financially independent life, if suddenly you have to ask for money from your kids, I don’t know how many of us will be comfortable doing it. But if you don’t start planning for your retirement today it’s not going to be easy tomorrow either. It doesn’t make a difference if you are 25 or 35; you still have decent time to plan for your retirement. We keep on thinking that there is still a lot of time before retirement and we can start tomorrow, but that tomorrow never comes. The right time to invest is today.

Similar to the amount of sacrifice done in achieving freedom, it requires lots of sacrifice today to ensure financial freedom tomorrow.  Especially when culturally we are shifting from joint families to nuclear families, high chances that our kids will want to stay separately, and hence retirement planning should be the first agenda in financial planning.

“If you buy things which you don’t need, you will have to sell things which you need” – Warren Buffet

Savings v/s Investment

For many of us, it is may be difficult to differentiate between savings and investment. Seldom people realise the difference between the two. Well in the dictionary savings and investments are synonyms, but when it come to personal finance there is a huge difference.

So what are savings?? Savings are nothing but depositing money into risk free products, for example, savings bank account, bank fixed deposits,money back insurance etc. The returns generated by these products are generally in the range of 4% to 9%. These products are good for short term parking of money but when it comes to long term investment or wealth creation, they lose badly.

What is an investment?? Investment is placing your money into a product which not only beats inflation but also generates return over and above inflation. This is possible only when you invest into products which participate in the growth story of the economy, which is by way of investing into equities. This can be done either in form of direct equities or through mutual funds. Other avenues are investing into real estate or other alternate products like currency etc.

What difference does it make if someone invests into a bank FD or a mutual fund??

Well, rarely people realise that firstly, the income generated by most of these risk free products are taxable and secondly the average inflation for last 30 years is 7.5%. So when you put your money into a bank FD giving 9% return, the net return you get after deducting tax (30%, assuming you are in top slab) is 5.7%. Good for a risk free return. Now, here comes the twist. The average inflation in last 30 years is 7.5%. What does that mean?? It means that you have actually reduced your capital by 1.8% (7.5% – 5.7%). OMG!!!!

Let’s take the example of equities. In last 30 years Sensex has given an average return of 24.83% CAGR, so even after reducing inflation of 7.5%, the investor would have made a decent return of 17.31% CAGR. Now this is called investment or wealth creation.

The average return given by various asset classes in last 30 years are (these figures are before considering inflation):

Gold – 11.46%
Bank FD – 8.43%
Sensex – 24.83%
PPF – 10.21%
LIC Bonus Rate – 5.27%

Investment can’t be something which eats your capital. Your investments should have only one work, to create wealth for you.

So, STOP Saving and START Investing.

Journey of Sensex

Journey of Indian Stock market
1979 BSE SENSEX = 100
1983 – Indian cricket team winning world cup. Sensex = 212.
1984 – Indira Gandhi shot dead & Bhopal Gas tragedy. Sensex = 245
1989 – hung parliament with Congress outside support. Sensex = 714.
1991 – Rajiv Gandhi assassination. Sensex = 1168
1992 – Indian economy opening up. Dream budget by MMS.
Harshad Mehta Scam. Sensex = 4285.
1993 – Bombing in Mumbai. Also at BSE bldg. Riots all over. Sensex = 2281.
1996 – Indian stock market goes digital with NSE’s new trading platform. Sensex = 3367.
1999 – NDA coming to power with Atal Bihari Vajpayee as PM. Sensex = 3740.
2000 – Technology boom. Sensex = 5001.
2001 – Gujarat earthquake. Sensex = 3640.
2003 – Big bull run start in Dalal Street. Sensex = 3049.
2004 – UPA coming to power with Left party support. Sensex = 5591.
2006 – Sensex conquering 10000.
2007 – Sensex conquering 20000.
2008 – Sensex falling after touching high of 21200. Crude oil rising upto $ 147.
2009 – Sub-prime crisis in USA bring financial instability world wide. Sensex = 9568.
2010 – Satyam scam, Common wealth scam, Telecom scam. Sensex = 17590.
2013 – Young Raghu Ram Rajan appointed RBI governor. Sensex = 18835.
2014 – BJP alone conquering 283 seats in Loksabha and NDA coming to power with 330 seats. Sensex = 25000.
2015 – Sensex = 30000.
– – — – – – – – – – – – –
From 1979 till date it is clear that in all adversity & prosperity Sensex have grown 300 times. Surely there have been downside also. But sooner or Later that downside have always been overcome.
Moral :- Be a systematic & disciplined investor because as age grows investment are also sure to grow.

Courtesy: A Friend

Dead or Alive

Do you know what differentiates between a dead person and an alive person?? Heart beats !!! If you have seen a Cardiac Monitor ( a machine in the ICU which indicates the heartbeat), heart beats are never straight. They go up and down, and that is the proof that the person is alive. A straight line means a dead person.

This is true for investments also. A straight line, means a product which gives a guaranteed return ( Bank Fixed Deposit or Insurance) can be considered as dead investments as they can hardly beat inflation. So for investments to beat inflation and generate good returns, it is important that they are not done in dead instruments. This is where equity or mutual funds come handy. They may be volatile but, they reflect that the investment is alive. The only way in which you can not only beat inflation but also create wealth is by investing into equity.

The worst mutual fund in the last 15 years has generated a return of 14% CAGR and the best fund has given a return of 28% CAGR. So even if you had invested in the worst fund, you would have not only beaten inflation with a good margin but would have also created some wealth for you.

The only secret to create wealth is to stay invested. Although it is important to save money in a bank or a fixed deposit, be clear that the purpose of this investment is arranging money during emergencies or for any expense that is expected in the near future. Any investment for long term has to be in Equity.

Stay healthy and stay invested 🙂