Whose game are you playing?

Imagine what would have happened if Anil Kumble had quit cricket because he can’t hit a hundred like Sachin Tendulkar OR Rahul Dravid stopped playing because he can’t bowl like Kapil Dev? They would have not only ruined their career but would have also missed such a great fan following.

Now imagine another scenario where all the players in the team, instead of focusing on their own strengths start copying others. Ishant Sharma fighting with Virat Kohli to come as on opener so that he can also hit a century and Rohit Sharma fighting to open the bowling so that he can have a good bowling record.

Funny scenario, right? You know what is funnier, that most of the people try to do this with their investments. They try to copy others and their investment strategy. They invest in stocks because their friends or colleagues are investing in them, or they invest in mutual funds because their relative is also investing.

Investments are a personal thing. You need to understand why are you investing, what product are you investing in, what is your investment time frame, what is your risk appetite etc. Just because your colleague or neighbour or friend is taking extra risk and investing his money in small cap stocks/mutual funds / ULIPs, you should not do the same. You should understand what game you are playing. Every individual has his own set of goals and investments should be done keeping them in mind. You should not invest in a product just because your neighbour / colleague is investing. For the sole reason that your goal and risk-taking ability is different from theirs.

Understand your risk appetite, your time horizon, your asset allocation and then invest. It is completely ok if your return on investment is 2% less than your neighbour or if you don’t invest on days when markets are down 5% or you invest in equity mutual funds rather than investing in stocks or invest in a debt instrument instead of equity, if it gives you a goodnight sleep.

People invest in stock market / equity mutual funds with a time horizon of say 5 years but get jittery when stock price / NAV comes down by 5%. If you are an existing investor you must be aware that equity markets are bound to be volatile and there is nothing to be worried about. If you are new to investments then start with Debt mutual funds, gradually move to hybrid products and then to equity funds and lastly if you feel like then sector funds. Stock market have given enough opportunities in past and it will continue to give in future also. There is no hurry to invest. First understand and then invest.

Always remember losses are not made because of volatility in stock market, they are made because of volatility in your mind and that happens when you invest in products which doesn’t suit your risk appetite.

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” – The Intelligent Investor

Main Aazaad Hoon

Like most of my blog, the title of this article is also inspired by Bollywood. Bollywood and Finance has always attracted me as there seems to be a lot of commonality in them. Both of them have lots of action, drama, hasi mazaak(Highs) and rona dhona (Lows) etc. Well as it is said that most of the stories of Bollywood movies are inspired from our day to day life, I thought of writing an article inspired by a famous movie title. Coming back to the point, through this article I would like to share how an individual can be free from financial trouble and that’s when they can say “Main Azaad Hoon”. Here we go:

The First thing one should do is to take a Life Insurance policy. This is the simplest and most economical way to ensure that your family future is secured and that they are free from any kind of financial trouble, even when you are not around. The number of policies don’t matter; what matters is the amount of insurance one has opted for. Well, there is no definite amount but as per thumb rule one should have at least 10-12 times of his/her annual income so that one’s family can continue to maintain the same life style. Having a life insurance becomes even more important when you have liabilities like a home loan or a business loan because here the money involved is very huge and can take away your lifetime savings. I won’t talk much about having a life insurance as I have already shared in my previous article the need and importance of it.

Second is to have a health insurance. Do you know that hospitalisation for ONLY 1 disease can take away our years of savings? Sharing few numbers as food for thought:

• One of the fastest growing illness in India is Cancer and the treatment cost can be anywhere between INR 8-10 lakhs
• In India, 1 out of 10 people suffer from some chronic kidney disorder. A kidney transplant costs around Rs. 7 lakhs whereas dialysis can cost you anywhere between INR 18,000-20,000 per session
• 25% of deaths in the age group of 25-69 are because of heart disease. The treatment cost here can be anywhere between INR 5-7 lakhs
• Hospitalisation cost in case of Covid is anywhere between INR 2-3 lakhs per person. The biggest problem here is that in case of Covid, multiple family members can get infected and may need hospitalisation. This will increase the cost highly.

Don’t think of the annual premium as expense but it is a small amount for peace of mind and safety of ourself and our family members.

In case you don’t have a health insurance, you should apply for one immediately and in case you have a health insurance, ensure that its good enough to cover the hospitalisation cost. If you already have insurance and the cover is not enough, you can opt for a “Top Up” plan instead of applying for new insurance policy. Top Up plans can provide a very high cover at a very low cost. A floater “Top Up” plan of INR 10 lakhs should not cost you more than INR 5000-6000 on an annual basis.

Third is to keep aside a sum of money which can take care of your day to day expense for next 3-4 months. This can be kept in bank Fixed deposit or in a Liquid fund / Arbitrage mutual fund.

It’s when one does all the above 3 actions i.e. Life Insurance, Health Insurance and creation of an Emergency Fund, that one is truly free and can proudly say “ Main Azaad hoon”. One can then start investing in which ever asset class suitable as per one’s risk profile. It can be Equity, Debt, Gold, Hybrid etc.

“A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life.” – Suze Orman

Asset Allocation

आए तो यूँ कि जैसे हमेशा थे मेहरबान, भूले तो यूँ कि गोया¹ कभी आश्ना² न थे
                                                                                                            -Faiz Ahmed Faiz

1- Jaise , 2-Acquaitance

Faiz may have not thought it this way but this para from his poetry describes the behaviour of our equity market in a very beautiful way. When the bull run starts, markets behave as if there is not looking back and it will continue forever; something that we saw in the last equity rally between 2014-2017. The second line explains the bearish phase which started from 1^st Feb 2018; wherein the markets took a U turn post Feb 2018 and since then we have not seen any signs of recovery.

When the markets are in bullish phase, we stop looking at valuations, corporate governance issues, etc. and during bearish phases we start doubting the best of companies. This happens in every market cycle and will happen in future also. The only way to get saved from this euphoria of getting carried away in either direction is following asset allocation strategy.

Once you have identified your goals and you are aware of your risk-taking ability, decide on an asset allocation strategy and follow that religiously. Asset allocation strategy simply means that dividing your investments in debt and equity depending on your risk profile and how far or near your goal is. For e.g. In a bull run, mid and small caps tend to outperform large cap funds but that does not mean that we move our entire portfolio to mid and small caps. Same way we should not move our entire portfolio in large caps when markets are not in our favour. In equity allocation, your portfolio should be divided between large caps, multi caps and mid-caps. Though one can change the allocation by 15-20% up or down depending on the market scenario; one should never change the entire portfolio.

Same way one should never have his entire portfolio in equity or in debt. It should be a mix of both the asset classes. There is no defined rule for how much equity or debt one should hold as that will depend on each individual but as a thumb rule your debt allocation should not be more than your age. So, if you are 40 years old, your debt portfolio should be around 40%. Again, this is just a thumb rule and will completely depend on each and every individual as per his risk profile and how far or near his goal is.

Its highly risky to keep your entire portfolio in equity as during these bearish phases which we are witnessing now where large caps have corrected by 10-15%, mid cap by 30-40% and small caps by 50-70%; the probability of losing your capital increases. Same way if your entire portfolio is in debt then you restrict your money to grow. For e.g. if your goal is 10 years away, it is criminal to invest in debt funds. For such goals you should invest in equity funds and for goals which are say 2-3 years away one should invest in debt fund. This way you will reduce the impact of market volatility and put your money to best use.

While doing asset allocation considering your risk-taking ability is of utmost importance; followed by your return’s expectations. The amount of risk that you can take depends on your inherent nature and it’s difficult to increase it or decrease it, whatever said and done. It’s easier to invest the way your friend or colleague is investing but seldom we know their risk appetite. When one invests without considering their risk-taking ability, the chances of taking wrong investment decision increases. You will either sell too early or wait too long.

The most important key to successful investing can be summed up in just two words-asset allocation. – Michael LeBoeuf

THE LAZY INVESTOR

Bill Gates once said, “I always choose a lazy person to do a difficult job because he will find an easy way to do it”

You know what’s the most difficult part in investing? It’s ‘Doing nothing’. With so much of noise around you, about your colleague making “x” return and another friend making “y” return, it’s really difficult to not do anything. As we don’t want to be left behind, we tend to take some action. We don’t take action to make money but only because of the feeling that if someone is making money or making more money than me, then why I can’t make the same amount of money.

Do you remember, the famous dialogue from the movie 3 Idiots “Jab dost fail ho jaye to bura lagta hai, but jab dost 1^st aa jaye to jyada bura lagta hai? “ Same way when our friend loses money, we feel bad, but we feel worst when they make money and we don’t.

Secondly, we are taught that unless we work continuously towards our goal we will not achieve it, and so we apply that to investing also. There are people who are always on top of their portfolio and ready to do some action. If markets are falling, they want to redeem money; if it’s going up, they want to add more; if Fund A  is under performing F, they want to change the Fund A and when Fund C  starts performing better than Fund B they want to dump Fund B. They feel that unless they take continuous action, they will not be able to generate returns in their portfolio.

This is where being lazy helps. It may not work in other aspect of life but in investing it works most of the time. Do you know the easiest way of doing this difficult job of investing? It’s SIP. It’s dull and boring, but apparently the most disciplined and prudent way of investing. Let’s look at some numbers to make it more relevant. Last 3 years return of Birla Equity Fund is around 4% CAGR but last 20 years is around 18% CAGR. Last 3 years return of L&T Midcap fund is around 0.5% CAGR but last 10 years return is around 16% CAGR. If one takes action at every downfall, he will seldom make money. The idea should always be to invest in a good fund house and a good fund, ride through the cycles and get good returns.

One should not change his mutual fund portfolio actively as the fund managers are doing this job on behalf of investors. Most of the good fund managers change the sector and stock allocation in their portfolio actively based on the market scenario. This not only reduces the cost for investor but also the hassles of entering and exiting the portfolios every now and then. You should change the funds only when they start giving below average return and there is no sign of improvement.

Being lazy does not mean stop tracking your portfolio but it simply means that taking the decision of inaction after looking at all the aspects. Being lazy should be by choice and not otherwise.

‘MDBSC’ – This term was coined by one of my Facebook friend. It means My Dull and Boring SIP Continues. So, whenever your friend or colleague comes and asks what are you doing in this market, simply say MDBSC. (My Dull and Boring SIP Continues).

 

MORE MONEY IS LOST OUTSIDE THE MARKET RATHER INSIDE THE MARKET

MORE MONEY IS LOST OUTSIDE THE MARKET RATHER INSIDE THE MARKET. I believe making money is quite simple in equity markets, difficult part is to lose money. Surprisingly most of the “investors” lose money successfully.

To make money in equities, the theory is quite simple, select a set of good funds, invest systematically, review periodically and stay invested. For e.g. A large cap fund like Aditya Birla Frontline Equity has given a return of 16% CAGR over last 10 years or a mid cap fund like HDFC Mid Cap which has given a return of 23% CAGR during the same period. This covers all the ups and downs of last 10 years including events like the Lehman Crisis. The idea was simple. “Keep investing”.

The tough part here is to lose money. For that you have to track your SIP returns on a daily basis, read the market outlook, listen to experts on CNBC and redeem your money or stop your SIP because some experts believe that markets may correct more. If one tries to time the market, then one will never be able to enter the markets again. One generally wants to be invested in the best fund , which apparently keeps on changing every year. The list goes on and works as a perfect recipe to lose money.  Always remember “MORE MONEY IS LOST OUTSIDE THE MARKET RATHER INSIDE THE MARKET”.

Volatility is investors best friend. It’s like that friend who gives us right advice but somehow, we never like them. Scams, elections, rate cuts, rate hikes, high inflation, low inflation, etc. will come and go as short-term positives and negatives. They can disturb the momentum for a short period of time but over a long period these events don’t even matter. If someone expects markets to deliver only positive returns then, equity is definitely not the right choice.

What matters is “PATIENCE”. I had mentioned in one of my earlier posts also that investments are like kids. Just like one doesn’t measure their kid’s height and weight daily, similarly one should not look at the performance of the funds daily.

The stock market is a device for transferring money from impatience to the patient                                                                                                                                   Warren Buffett

A small reality check

Sir John Templeton once said “The four most dangerous words in investing are – ‘this time it’s different’”, but there is something which is even more dangerous than that – Postponing your investment decision. Isn’t it intriguing that we work hard to earn money and then we keep it in a bank account or a fixed deposit to depreciate? Most of the time we don’t postpone our “SPENDINGS” but somehow we defer our investments. One can have various reasons to defer investments but are any of them justifiable? Let’s run a reality check for few of such reasons:

• Busy to decide?? You may be busy today but don’t forget that it’s just a matter of time when you will retire and the only thing that will rescue you from most of your troubles will be the money saved and invested today. So take out time. Just a couple of hours every 6 months are more than enough.

• Not having sufficient money to invest? You just need to save Rs.1k per month to start a SIP.

• What will Rs. 1k saving do? Well, something is better than nothing, so at least start one.

• Is it the right time to invest? Somehow, no one has ever been able to time the market perfectly. So the right time to invest is now. Divide the amount you want to invest and spread it over a period of time.

• Don’t know where to invest? Hire an advisor (not a banker) and he will do the homework for you. Don’t invest in something which is complicated or difficult to understand.

Another point of indecisiveness is whether it makes any difference to start investment early or not? Let’s run a reality check on that too. So, if you require Rs.25 lakhs after 20 years for your kids marriage, you just need to invest Rs.2k (assuming 15% CAGR) per month. The total investment you do in 20 years is Rs. 4.8 lakhs. However, if you postpone this investment for 5 years, you will have to save Rs.4500/- p.m. The total investment that you will do now is Rs.8.1 lakhs. The amount required to achieve your goal has almost doubled. This happened because you lost on compounding for 5 years.   So it’s important to start your investments early and then let the money work for you. Well, this was for just one goal. Now think how much additional investment you will have to do to achieve all your financial goals? So either start your investments today or be ready to forego some of your goals.

 

“Money is always eager and ready to work for anyone who is ready to employ it.” 
― Idowu Koyenikan

 

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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.

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 🙂

Invest with purpose

One of the most important things when we invest is to be clear about the purpose of such investment. Most of us invest without a goal in mind, which many a times, results in early exit of the investment. We invest for our future but then exit that investment to fulfill short term needs for example, vacation expenditure, vehicle purchase, etc.

Have you ever left your home without deciding where to go?? I am sure the answer is “no”. Let’s try and implement the same strategy to our investment. Whenever you invest, whether in a bank FD, mutual fund, or SIP, try and assign a goal to it. This will not only keep you away from exiting that investment but will also ensure that you have invested enough to meet that goal.

For example, if you have a kid who is 10 years old and you know that you will need at least Rs.10 lakhs( present value) for his higher education, considering 7% inflation, your actual requirement after 10 years will be approximately Rs. 27 lakhs. This amount definitely looks huge today, but can be easily achieved by doing a SIP of Rs.4500 per month (assuming 15% returns p.a).

Now when you do your next SIP (investment), attach this SIP to your kid’s education. There are 2 benefits of doing this. First, you will not withdraw this money to buy a new mobile phone or to go for a holiday and secondly this will help you in keeping a track of how much more you need for your kids education. Say after 5 years the value of SIP is Rs.4 lakhs, you know now that you will need Rs. 23 lakhs more in next 10 years to ensure that your kid’s education is not affected.

Use this funda for your new as well as existing investments and see the magic!

Investments are like Kids

Treat your investments like your kids –  Don’t have more than what you can manage.

One of the most important things you teach your kids is discipline. Same is true for your investments also. Your kids grow slowly, similarly, let your investments also grow slowly, don’t try to yield all the returns in one single day. Do you teach entire syllabus in one day?? No. Then, why invest everything on one day. Schools teach kids in a step by step and disciplined manner. Apply the same logic to your investments also. You will be amazed to see how your investments grow.

How many of us measure our kids height and weight on a daily basis?? I am sure none of us do. But when it comes to investing in direct equity / mutual funds we track them on a daily basis. Funny isn’t it ?? Well, nothing wrong in tracking but you should insulate yourself from taking hasty decisions of exiting investments because it didn’t perform well for 3 months or 6 months.

Treat your investments like your kids. Nurture them, pamper them, give them time to grow and perform, take corrective actions when necessary, be disciplined.

Believe me; this child will not disappoint you.