Archive for Financial Planning

Things that matter

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. – Warren Buffett.

Phrases like “market panic”, “mayhem” and “meltdown” are being seen in headlines over what is happening in China, which has been dragging the worlds equity markets down for some time now.

As investors hearing news like these, we have two choices

1, Does it matter?

It does matter if your investment time frame is a week, month or may be even a couple of years. But if we are clear on our asset allocation ( how much we invest in equity and debt ) and are investing for what matters most to us like our children’s education and our own retirement, what is the headline on markets today, this week or next month does not really matter.

2. Can we control it ?

Obviously not, what happens to China or oil prices and how it affects our markets is something which we have no control over.

Instead if we focus on

A. Saving more : Having a budget, saving at least 30 -40% of our income, not falling for the  ‘great online shopping sale’ that seems to happen every weekend. Having at least  3 months of monthly expense for a rainy day.

B. Investing the savings properly : Having a goal for the investments, investing for real tax efficient return ( ie post tax and post inflation return), Just as we earn monthly, investing the savings monthly helps us to create wealth.

C. While investing it is better to  avoid products that are  too complex. Avoid products which club insurance with investing, Keeping investments simple with bonds, equity via mutual funds is the best way to go.

Once we focus on the intersection between things that matter and things we can control, what happens in China last week or somewhere else next week becomes less of a concern.

 

 

 

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Healthy, Wealthy and wise !

Today the media will have a field day as equities crashed by over ‘1000’ points or 3% to put it correctly !. These are normal and Prashanth Krishnan in twitter mentioned that this has happened 55 odd times in last 15 years, I’m sure you don’t remember the last 3% fall, forget the first one !! Media works on the principle of bad news being good news for their business, more people watch TV and they can get more TRPs and advertisements which is more money for them.

As an investor, we make money by staying invested, ignoring the headlines and if at all there is a serious fall ( say 20% from top)  investing more if possible. We don’t make money by following headlines, in fact serious research has shown regularly following media ( be it on markets or politics is injurious to both your health and wealth, not to mention wasting precious time !) .

Be healthy, wealthy and wise !

 

Healthy – instead of seeing TV debates on politics, go for a walk !

Wealthy – instead of listening to “experts” on business channels, keep investing via SIP

Wise – Doing the above two will make you wise than most people you know !!

If you don’t believe me listen to what M/s Peter Lynch & Warren Buffett have to say on the subj. 🙂

 

What stock market?

What stock market?

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Inner vs outer score card

“If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?” – Warren Buffett.

The answer to this question would tell what kind of score card we all have in our minds. Outer or Inner.  The thing about outer score card ie worrying what the world others think of  you and doing things that would make them think you have arrived in the world is an endless rat race. It is fine to be ambitious and hard working but that must be because deep down you want to be better, not because you want the 1008 friends on facebook whom you have never met to think you are better. Why is this so? because peoples change all the time, and it is tough to have their approval all the time also we may erringly put up appearances for their sake.

Having an inner score card is more rewarding to yourself, and i would say less stressful. You would have lesser EMIs to pay, more money to save and invest for the long term.

An outer score card person may do something like this : Have a large car, big house for a small family, splurge on gadgets and holidays, send children to a ‘posh’ school because that is the best money can buy, keep buying new gadgets. The result will be a person whose sole aim in life is to make his bankers rich as he keeps borrowing more. He will find it difficult to sit down and enjoy because he has to work hard to pay for what he has bought. Michael Jackson and Mike Tyson were both worth hundreds of millions of dollars, in their peak. Yet MJ was forced to sell his mansion and Tyson is bankrupt today.

An inner score card person on the other hand will do something like this  : Live in a small apartment, have a two wheeler or a small car, eat out where the food is good,  Less hurried hence more time for family, is seen jogging  in the park or the playing in the beach with his family than in the mall or fancy restaurant. Travels by planning ahead and saving for a holiday instead of borrowing for it. Invests well for his goals like retirement, children’s higher education etc so that neither he depends on them for money in old age nor they depend on him for lack of education. He may not be the “king of good times” but he certainly is a happy and content man.

While the outer score card person worries about being better than others, the inner score card person thinks of being better than himself compared few years back.

Put this way, the answer seems obvious which score card to follow.

 

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3 Simple steps to stress free investing

 

1. Check and collate all of your investments : Be it Insurance, Mutual Fund, shares, bonds, FD, anything. Put it all one folder, use a good spreadsheet or software ( we use Mprofit)  to track all of it in one place. This will not only help you know where you stand but also help you at the right time in filing tax returns. This will take time but will save you lots of pain later. Automation can help you here, if you give same email id across investments it is possible to get one statement for all your MF and equity.

2. Keep investing simple : Investing is about making your money work for you, that is all. 4-5 Mutual Fund schemes via SIP, 1 bank account, 1 term plan and a medical plan that is all one more or less needs. Ensure that there is nominee for all your investments and that you have a will in place. Never buy  investments under “pressure”, be it from relatives or bankers.

3. Never sweat the small stuff : Things change everyday, don’t fret. Talking heads on TV are paid to talk, but no one pays you to listen, so don’t. Always think will this decision matter one year or two from now on? If not, it is small stuff, this will be the key question to ask before you take any decision financial or otherwise.

Finally, in life small improvements like small investments make large gains in future. Start today and declutter your investments and you will thank yourselves 2 years down the line.

Happy weekend,

 

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Play now and pay later !

Better be a ploughman (worker) on your legs than a gentleman on your knees (seemingly rich but in debt) – Benjamin Franklin

Muthu recently wrote a blog on what is short and long term http://wisewealthadvisors.com/2015/05/24/short-term-and-long-term/

thought i will expand on it a bit.

Short Term : Play now and pay later

Long Term : Think & decide

a hoarding screams

The above hoarding is an example of play now and pay later, in this case EMIs for 24 months.

Now this is clear, if you want to play now, you can as from cars to phones everything is available at zero or low down payment, but do remember, you definitely will have to pay later along with interest.

So, what is long term thinking here: first think. Every financial expense means you are borrowing from yourself in future as you alone have to pay the bills later.  An investor thinks the opposite, invest now to get more later.

After thinking if your decision is to still spend money on buying stuff, please go ahead but only with money you have.If you don’t have the money, you can not afford it so find an alternative till you can afford it.

A reminder here, i’m not all suggesting that investing is denying life’s little pleasures, definitely yes. I’m all for the weekend movie or dinner, the key word here is ‘little pleasure’, spending one months income on a gadget is definitely not little, though the EMIs make it look as if it is little, they add up to a lot!.

I’m not against borrowing for purposes of long term benefit, such as a house or education of children. They are basically investments for a good future, the 50 inch TV does not fall under investments even though it may be smart TV, but you would not be smart to buy it on installments. It is downright dumb to have a smart TV but not much saved up for a rainy day.

Pay for it if you can afford, else, look for alternatives. Your life will not improve much by owning too many gadgets, which seem to go out of style every weekend but your bank balance and investments will certainly improve and that to me and i hope also to you is the ‘deal of a lifetime’

 

 

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High end investing and low end returns

Most of us dream of owning a high end car or bike ( Harley this or BMW that ) because those vehicles arguably are the best in class and are seen as exclusive.  This works exactly opposite in investments. Many people, especially the high net worth investors get caught in this trap of exclusivity-is-better while investing.

This was sadly discovered by the singer Suchitra Krishnamurthy who was a ‘privilege’ customer of a large foreign bank. Check the link for the full story.

http://www.firstpost.com/business/money/hsbc-suchitra-krishnamoorthi-case-the-moral-is-do-not-mix-insurance-and-investment-1964163.html

Sadly, this not an one off event and has happened to many. Even public sector banks are not immune to this disease of selling toxic investment products to their ever believing customers who believe that anything sold by a ‘government’ bank or insurance company is safe. Check out the link below for an example.

http://www.livemint.com/Money/57wQlkkdLuC8GvifojfdMK/How-to-shrink-50000-to-248.html

In investing, simple stuff works best. In the past highest return came from buying-and-holding on to investments like equity  mutual funds for 20 years( 16%+ p.a from equity funds).

But as one’s wealth grows, it attracts lots of attention foremost from your bank as they are fully ‘aware’ of your account balance.  You will be tempted with Gold Privilege Account, Private banking, exclusive relationship manager   along with free invitations to concerts, limitless credit cards and other such knick-knacks.

While buying any investment please remember that what matters most is

1. Where is the money being invested ?

2. What is the cost ?

3. What is long term track record of returns ?

4. How quickly can you sell?

5. What are the charges for selling?

Read all this in the application form before signing. Many who happily sign on the dotted line without reading do not realize that their hard earned wealth is being invested in things that can not be sold easily, has high costs and mostly low returns.

What is the solution for the investor then ?  Whether one is a HNI or not, I suggest sticking  to simple open ended equity funds that have been around for 10 years or more (only if you have the patience to wait for next 10 years at least). While mutual funds do not guarantee any returns, they are the most transparent investment products and are well regulated. While future returns can vary, they will likely remain the best option for wealth creation.

So next time when some one tries to push an investment plan along your way, please remember that it is not a good idea to mix investments and insurance, Term Insurance is what most of us require for protection and investments are for growth, keep it simple and separate.

 

PS :  I advise on mutual funds and hence am biased towards it and against other products. But most of what i write is from my personal experience of seeing  investors suffer after buying products with long lock-ins and low returns.

 

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Three myths about equity investing.

 

Myth No 1. Only rich can invest, for middle class only PPF and other savings makes sense :

Not really, while PPF and other deposits give around 8-9% p.a returns over 15 years  equity funds have given around 14%p.a to 20% p.a.

One lakh invested in equity funds ( see picture below) is valued anywhere between Rs.  7 lakhs ( for a very low performing fund)  to Rs. 15 lacs ( for a good fund) today, whereas the same Rs. 1 lakh in PPF is Rs. 3.9 Lakhs. The difference is Rs. 3 Lakhs, not small difference for a Rs. 1 lakh investment.

So any one from middle class can be rich, if they set aside a part of their savings to equity funds  and forget about it for 15,20 years. Of course PPF is safer, equity funds may not be, which leads to second myth.

Myth No 2:  Equities are risky.

Yes, but that is no reason not to invest in equity at all, by all means continue investing in PPF if safety is paramount but do invest in equity funds too and give it the same time as you give your PPF. Missing out on this 15%+ kind of returns is wrong, most of us in middle class can never become financially free if we continue to depend on 9% returns to get wealthy while we pay 10% interest on our home loans and 12% for educational loans.

Myth No. 3 :  It takes money to make money.

It does, till you see how little money it takes to make big money.

Rs. 5000 invested p.m ( or Rs. 166 per day if that gives you some ideas to save ) at 18% return for next 20 years can become Rs. 1.1 Crores, 18% is what equity funds have delivered over last 20 years, some have been higher at 20% too. Even assume we get 15% in future, it will be a cool Rs. 75 Lakhs.

 

To sum up :  Equity is the one asset class that is missing from an average middle class families portfolio today, most diligently stand in queue and invest in PPF, have some gold and real estate but nil to very little equities. If one gives the same time as PPF to equity funds and invests regularly think the results would be satisfactory to say the least.

Happy investing.

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Picture source : Manoj Nagpal via Twitter @manojnagpal

 

 

 

 

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Whataydeal whatafeel !!

The now famous ad from an online retailer has a song Whataydeal, whatafeel. For a few days the retailer had announced discounts hence the advt. The nice video of happy shoppers dancing to the song is a great ad which reinforces that we are always happy getting a good deal.

This sadly however does not happen in investing, very few dare to invest when markets fall, and no one for sure dances when markets fall !! Instead we have pictures of people gaping at the prices in front of stock exchange.

market at 50% off in 2009 but no one is dancing ! Image Source : Reuters

 

Newspapers use words like panic, mayhem, blood bath etc.

The investment gurus tell us that buy low sell high is the mantra to make money but that would require the investor to muster courage to buy when everyone is selling in panic.

So, is it impossible for an ordinary investor to get the deal which market offers ?

No, the simple way is to invest a fixed amount every month in an equity mutual fund that not only helps us to increase our wealth but also ensures that we buy more when markets are down ( since we invest a fixed amount, lower prices would mean more quantity) and less when markets are up.

Over the last 10-15 years, equity funds have delivered anywhere from 16% to 21% p.a. Anyone who invested as little as Rs. 5000 p.m for last 20 years has made Rs. 1.1 crore ( assuming a return of 18%)  now that is whatay deal & they are dancing their way to the bank !

If you want whatay feel in future, please do invest a fixed amount for next decade or two in equity mutual funds to get whatay feel returns !

Start with as much as you can and increase as you go, when you can save more, when you get a raise etc.

Not many will do this, those who invest in equity funds regularly are few and far between, it is much easier to buy some electronic stuff for Rs. 29999 only that they will throw away to buy another whatay deal product after couple of years( or is that too long these days 🙂 . But those who do invest, are likely to be seen dancing their way to the bank in future, singing whatayfeel 🙂

Note : though returns can vary etc. Historically equities generate the best return and that investing fixed amounts is the best way to invest in equities. Returns can vary but my take is that equities will remain the best place to invest in future too.  That said, Mutual Funds like anyother investments are subject to market risks. Past returns may not be repeated, future returns are not known etc.,

Image Source : http://in.reuters.com/article/2008/01/21/idINIndia-31510420080121

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After all, what can 500 Rs p.m grow to?

The letter below,written by a dad, whose 7 year old son saved 500 Rs per month and gave to his dad for investing. Think his dad wanted to teach him about investing in a disciplined way through mutual funds so gave this amount as pocket money. Before you say nice story and move on, as after all, what can Rs. 500 p.m grow to, a few thousands by the time the boy reaches college or gets married? Here are the numbers and they are startling..

College is 10 years away when he turns 17. by the time the little boy goes to college, it will be Rs 1.68 Lacs. Decent money, but definitely not enough for a good education that too ten years from now.

At 27, when the ‘boy’ is old enough for marriage the investment would have grown to Rs.11 Lacs good sum but dont think enough for the typical big fat Indian wedding even today, forget 20 years later.

Let us assume that since it is not enough for education, or marriage the dad will continue the Rs. 500 investment and the son after getting a job invests the same amount every month till he is say forty,

So the total amount invested is  Rs. 1,98,00 over a 33 year period ( Rs.500* 12*33)

Assume 18% return ( markets have given 20% in the last 20 years but let us assume 18%)

The total value is a whopping Rs 1.22 Crs.

All from Rs. 500 p.m invested diligently over a long period in equities as they give the best returns over long term. If it were just increased by Rs. 500 more to Rs. 1000( which is what you may be paying for your mobile bill every month!!) it will be Rs. 2.44 Crs. Agree that inflation would ensure that Rs. 2.44 Crs may not be enough 33 years later but it is better then not investing anything, right?

Now, what is your excuse for not investing, that you don’t have Rs.500 or Rs.1000 pm ?

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From 1 to 100, How 1% change can bring success.

What did Dave Brailsford , a British cycling coach, do to make his team win the famed Tour de france cycling tournament?
And, how can it make you a better investor?

We all know “Save more, Invest better, Spend less” is the solution to our financial problems. Don’t we? We need money for various reasons including for down payment for a  house, children’s education and our retirement. But, we think this would require big changes in our lifestyle and hence we postpone investing.

This is because we are all creatures of habit and find it difficult to  change. What if I tell you that it is no longer the case? What if I tell you that you would not be required to make a great deal of adjustment? But, would you change something as simple as 1% of your routine to get great results?

First, the story which inspired me to write this blog:

Dave Brailsford , a British cycling coach, wanted his team to win the famed Tour de France bicycle race that lasts for 21 days and covers 3500 kms. He made changes as simple as carrying comfortable pillows to hotels so that the players can rest well, making the riders wash hands regularly so that they don’t get infections. By doing this and other tiny changes he believed that his team would win the title at least in the next 5 years. He was wrong,  his team won within 3 years !!. (You can read more about it here : http://jamesclear.com/marginal-gains)

After reading this remarkable story, you would have now understood that even small marginal changes can have big impact in the long run. The best thing about it is that they can be implemented easily.

Here are some small changes you can make to win in the journey of financial freedom:

1. Start investing – Don’t wait for the perfect day, the perfect income at which you will start. But start right now, with what you have. Take the first step.

2. Keep looking for improvements – Small changes, like having auto sweep in savings account so that your balance earns a little more. Put aside 50 / 100 Rs from your purse every day separately, and invest the money every month. Keep your credit card at home and take only the necessary cash if you think you may overspend while going out. Open an investment account for your child. Your kid will be thrilled and you would be showing them practically what it is to invest and what is profit etc.,

3. Give yourself a treat : For every small improvement that you do, treat yourself with an ice-cream or snack. What is life after all with out enjoying our victories, however small!. This victory reinforces that we are on track and we will look out for more areas of improvement.

On the flip side, small mistakes compound  over a period. Avoid mistakes like investing money in the “get rich quick” schemes ( MLM , Plots that will ‘assuredly’ double in value in 1 year, ‘insurance scheme’ with 20% return etc).

So, now tell me what improvements are you doing or planning to do and what mistakes you will avoid ? Would love to hear your experience.

Unravel the Sir Drave Bailsford in you. And, win your Tour De life cup!

Happy financial year 2015!

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