IBSAF WORLD - February 2008

Boom or Bust… How planning always helps…

Place your hand on your heart and ask yourself, have you really made money? Are you happy with the way your investments have performed? Was something missing? Could things have been better?

The stock markets are down about 25% from the peak levels they touched early this month. People lose money and sometimes a lot of money. This shakes confidence. Just a couple of months back every expert on stock market investments was shouting from the top of the roof that India is on a growth trajectory not witnessed before in our history. We are a growing economy and that every statistic available to us signals more growth and positive development in years to come. But suddenly the tide turned and the stock market crashed and now the experts are giving us reasons as to why the stock market fell.

As a result ordinary people like you and me feel cheated. We lose confidence in the stock market, start believing that the stock market is like a gambling den and it is a place where you lose money. Hence we either decide to cut losses and cash out from the stock market or its takes us a long time to return back to the markets.

There is obviously something wrong somewhere. Either the experts were wrong somewhere or your investment decisions went wrong somewhere down the line. However the funny thing is nothing is wrong here.

If there is something that is wrong it is our planning or rather the lack of planning. There is a method of deploying funds into the equity markets. Methods are many and in other words its just a financial discipline. If you follow a sound discipline I firmly believe you just cannot go wrong. Here is my method;

Fundamental Assumption: (Always to be kept at the back of your mind.)
“Equity investments are assets that will generate the maximum returns over a fairly long period of time.” If you trust this you will not go wrong, that is certain. Volatility is just part and parcel of investing in equity market. 20%-30% volatility is implicit for equity investment at any time. That is the basic nature of this category of investments. Has the business projection or growth prospects of a company changed with the change in market place. Obviously not so why should you change your view on the market. There is nothing like a target if the company you invest in has a sound business model. Short term and intermediate volatility should not change your decisions and overall outlook of the market. If you cannot stomach this then you should not even look at the stock market. If you do not like the rules of this game obviously you should not play it.”

I also believe that there is a fund deployment method that helps negotiate volatility:

What is your surplus? How much can you save from your gross earning after deducting all expenses i.e. your taxes, loan instalments and all living expenses? If it is above 20% it is good. 20% is a minimum and if you cannot meet this, you must take serious note and reassess your expenses or income as the case may be but certainly look at this before you even consider investments in general.
From this amount deduct the amount you require for meeting your basic financial requirements like insurance, medical contingencies etc?
The balance amount is what is available for managing long term, medium term and short term financial goals. For short term goals i.e. for goals of less than 1/2 years it would not be wise to commit any money to the stock market. For medium term goals i.e. 2/4 years a 60:40 strategy is alright with 60% being in equities. This must be done with an assessment of general overall outlook. In recessionary or non-bullish periods this may be reduced to about 50:50.
For goals beyond 4/5 years you may use equity investments. What you need to control here is your greed and expectations of the future. Expect no more than a return of 12% to 15% or so per annum but remember you many not get this each year, however if you were to look at your portfolio after 5 to 7 years you will see that on an average your wealth has grown by 15% or so. In reality you may land up getting much more as well. What you must not forget is that you must invest with discipline. You can choose to invest in equity mutual funds or shares as you like. For shares you have to be sure that you have done extensive research.
Finally how you actually place your investments is also important. SIP directly into equity mutual funds may be a great idea but is not foolproof. In the intermediate you could lose significantly in SIP also. Ask your advisor/broker to help you do a bit of asset allocation and thereby risk management.
If you plan to invest into equities directly do not be lured away by low priced or as we call penny stocks. They have a tendency to seriously bruise your portfolio in bad times.

That is all that there is. It is not like learning rocket technology it is just simple financial discipline. Forget about IPO’s, fancy derivative strategies, futures, options, arbitrage etc., all these big words are nothing but trading instruments and trading is a zero sum game. This essentially makes your broker and advisor far richer than you will ever be.

Just Rs. 10,000 invested say per month for 20 years earning 12% return can easily give you your first crore! It’s just so simple. Multiply that 10k with your saving potential and do the maths then!