Subramoney

this article appeared in reuters india’s  personal financial page….

If my students do not ask “When will the market touch 21000 again?”, I ask them the same question.

The most optimistic answer I have got is 6 months and the most pessimistic answer I have got is 2 years. Very clearly short term memory is very strong and erases all long term memory! So I translate the question a little and ask “How long does it take your portfolio to recover after a bear market?”

The best answer, as always is “I do not know”. However, the ego of the sales guy and fear of the customer ensures that an answer “palatable on that day” is “6 months”. Luckily you can say the same thing for 3 years, and nobody will blame you (or remember).

I have tried to see what happened in the past (with the caveat that the past is not an indicator of the future, as always). The Sensex was 574 in March, 1986. After that it reached 713 in Mar, 89. Similarly the sensex was 4285 in March, 92 and convincingly crossed it in March, ’00 when it closed at 5001. However if you had entered the market in March ’00 then it was in Mar ’04 when it reached 5590. Assuming you had invested in March, 2008 when the index was 15644 when will it cross 15644. This is your question, is it not?

So let us see – 3 years, 9 years, 4 years, ….you do not want to believe it, do you? So it might be a while before we say a definitive number.

But there’s a way to avoid this entire “catch up” worry: Buy an index fund. I call it “peace of mind” investing. The best performer in my wife’s portfolio is Hdfc Prudence fund over the past 5 years.

And that investment continues to do well – the fall is cushioned by the fact that there is an element of debt in that fund – about 30-35%. Though I do not know whether that is a good strategy for the long run, I am taking that call!

I am taking a wild, guess. However, I feel if you index 70% of your equity portfolio in a large number of stocks (like CNX S&P 500) by doing a SIP you are likely to outperform many of the fund managers. As I said earlier market calls are fund manager jobs, not column writers’. But I will take that chance. Benchmark mutual fund is launching a fund which answers to this description.

Is there a downside in such a fund? Yes given the liquidity in the indexed stocks (all 500 are not liquid enough) there will be a high tracking error. And unless the fund house collects a lot of money, the asset management charges will not come down – the current charges are quite high for an index fund.

Like any equity product, it pays to do your research. An index’s history and longevity are some of the best benchmarks you can use.

Countless investors have been sacrificing returns for safety. But with indexed funds, it’s a decision that they should be easy to make.

“I have invested in M/F near 2.9 lacs in various funds in various firms. Now NAV of all the funds is lower than the NFO. It is worth about Rs. 1.9 lakhs. Should i continue or exit?”

In such extra-ordinary times this is a pretty normal question. All those investors who were brave in Jan ‘08 when the index was at 21000 are now panicking. Co-incidentally the index at the time of writing is HALF of the Jan index! Risk, they say is counter-intutive. When you think is highest it perhaps is lowest and vice-versa.

What should this reader do? Simple he should stay invested. Assuming that the investments were made in a lump-sum his portfolio could be down anywhere between 40 to 70 percent. It is all right to lose money, but do not lose the lessons of investing.

What caused it? – Lack of understanding that a market which goes up can also come down. The speed with which the equity markets went up were matched in viciousness in the downward journey. If he knew AND he was investing, he was understanding the risk. However if his agent (or relationship manager) told him “next month the index will be 25000 and he believed it, it is his fault – NOT the markets’ fault!

Most agents and relationship managers are rewarded better on a lump-sum basis than on a SIP basis. However, readers should push the agent for a SIP form rather than a lump-sum investment.

Investing through a SIP is a safe and sensible way of investing – so all readers who have invested should start a sip at least now. Over the next 4-5 years you will get a return superior to debt market returns. However stop tracking your portfolio on a daily basis. Just relax and let the fund manager do his job. Most people who have done a SIP in a balanced fund (like Templeton India pension plan) for the past 4 years are also in the red. However if the markets were to suddenly bounce to 14000, they might suddenly be in the black!

In all market conditions remembering that equity markets shudder, quiver and fall – dramatically. However, it is the markets resilience that it comes back usually stronger. So go out there and read about equity markets, keep learning, do a SIP and please appreciate that equity markets are for the long term. When I say long term I mean 7 years plus – and I have friends who think I am being aggressive. The real good fund managers normally mean 20 years as a long term period!

This headline is so contagious that everybody will want to know what is inside this! However, tips on which share to buy does not create wealth. So if you were expecting me to say “Buy Hindalco, Tata steel, Tata Motors, etc. you will be disappointed. Sorry!

Here are some tips however, on how to behave in a falling market. Well you need to remember the following:

1. Why did you do your SIP: Most SIPs are done to meet some target - child’s education, own retirement, etc. so if that goal is intact keep paying your SIP amounts. One big advantage of an SIP is it allows your investment to be free of emotion (emotions are perhaps your worst enemy, not market behavior). So keep your SIPs going.

2. Failing to follow through your ideas cost you more: People promise themselves that they will buy when the market falls - but when it falls they keep waiting till eternity. Do not do that. Just let your SIPs run…do not panic, do not over do - in a bull market or a bear market.

3. Do SIP in mutual fund portfolio NEVER IN A SINGLE SCRIP. If you were (are) doing SIP in Biocon, MindTree, Silverline, Crest Animation, ….you will be in the RED…and you may lack the conviction to do follow through purchases. This fear is increased when the media says “Breaking News….markets have fallen 7%….” etc.

4. A fund with a high beta is something most investment advisors avoid. However from a SIP POINT of view, the more volatile a fund, higher impact of Rupee Cost averaging.

Which is the best channel to watch if you are an investor?

Cnbc? Ndtv Profit? Zee Business? …

Well what about Animal Planet?

O.k. Okay…I am wrong, but please read ahead especially if you are asking me …

Will watching Animal Planet help me answer the following questions?

Will inflation touch 17% six months from now?

Where will oil be six months from now?

And where will the sensex be?

What about real estate?

Fact is, investors who try to time the market are fooling themselves. Jumping in and out of the market isn’t a reliable strategy for wealth creation, and it isn’t successful - period.

Fact is, you are trying to fool yourself by hoping to get answers to these questions by watching the business channels.

You cannot get an answer to these questions by watching Television, or by doing a PhD in Finance. So stop attempting to answer these questions. Period.

Generally in any sport or in real life activities you win by controlling your emotions - not by succumbing to them. So unless you are really made of steel you will succumb to the emotions of the TV analyst. Just remember the channel makes money if you watch. You make money if your portfolio does well. I have still not seen proof that watching television (or reading the pink papers) can create a good portfolio. I may be wrong, but I still have to say it!

SIP creates wealth in the long run, however it gives no immediate gratification. Equity trading (what the common man thinks is investing) gives immediate gratification and does not create wealth for the client. The broker wants him to trade so that broker’s wealth goes up.

So what is the solution?

Sell SIP in equities as a fantastic product. The call goes something like this - “Sir in volatile markets you should be investing in small lots instead of lump-sum, so we have an EQUITY SIP …it works like this. Every month you invest Rs. 5k in a scrip that we choose, thus you create a portfolio”

Sounds good, well it is not. Averaging works only in a portfolio - rupee (dollar) cost averaging - which is what SIP helps you do DOES NOT WORK IN CASE OF A SINGLE SCRIP. Imagine if you had bought silverline at Rs. 1300 ….and you are still averaging, you would have been wiped out. In case of a large cap mutual fund, the ups and downs are not so steep, so you can do an SIP.

With a single scrip you can average, but requires tremendous amount of information, and skill. Do not fall for such sales pitches. You will be red in 3 years time!

This actually reminds me of a Ben Graham quote:” The individual investor should consistently act as an investor and not as a speculator”

In a topsy-turvy world, you need to live by the new rules.

So, if you have some money saved or invested and want to see it grow, well, that’s the spirit, right? Well, for many, the biggest impediment is debt. Your investment strategy may be bogged down by education loans, car loans, house mortgage, personal loans, etc.

Does this mean you should not invest and keep postponing your investment program?

No!

No doubt, being in debt, could make it tough for investors to make money; because if you have some high-cost debt it may not be possible to get returns higher than the rate of interest at which you have borrowed. Hence it is thought to be counter-productive to simultaneously invest as well as borrow.

Expert say

Many financial planners would suggest that you pay out or cut down your debt. In other words, if you have a credit card loan at an interest rate of 42% per annum (pa), the money you are investing will have to make more than 42% pa to make it more profitable than simply paying down the debt. There may be investments that deliver such high returns, but you have to be able to find them, knowing you are under the burden of debt. I surely cannot find them.

The debt trap

You may be paying off the following:

1. THE most expensive loan

This is your credit card debt. High interest is relative, but anything above 30% pa fits in this category. Carrying any kind of balance on your credit card or similar high-interest vehicle makes paying it down a priority before you start to invest.

Personal loans at 30% pa are also included in this category. Despite a bull market (which may last another five years?), getting a 30% pa return on a sustained basis is a pipe dream. Also did you know that SIPs started as back as a year back are now in the RED? (31 Mar, 08 - today’s comment). You should also be keeping track of your net-worth and for this you could go to www.myirisplus.com which has a software that helps you track your net-worth.

2. Low-interest debt

This can be a car loan, a line of credit, or a personal loan from a bank. The interest rates are usually described as prime plus a certain percentage, so there is still some performance pressure from investing with this type of debt. It is, however, much less daunting to make a portfolio that returns 12% pa than one that has the pressure to return 25% pa.

3. Tax-deductible debt

If there is such a thing as good debt, this is it. Tax-deductible debts include mortgages, student loans, business loans, investing loans and all the other loans in which interest paid is returned to you in the form of tax deductions. Because this debt is generally low interest as well, you can build a portfolio while paying it down.

Note: The types of debt we will cover in this article are long-term low-interest and tax-deductible debt (like personal loans or mortgage payments). If you don’t have high-interest debt or, better yet, all your debts are tax deductible, then read on. If you do have high-interest debt, you’ll need to pay it off before you begin your investing adventure.

The time to invest is NOW
Debt elimination, particularly of something like a loan that will take long-term capital, robs you of time and hard-earned money. In the long term, the time (in terms of compounding time of your investment) what you lose is worth more to you than the money you actually pay (in terms of the money and interest that you are paying to your lender).

You want to give your money as much time as possible to compound. This is one of the reasons to start a portfolio in spite of debt (but not the only one). Your investments may be small, but they will pay off more than investments you would make later in life because these small investments will have more time to mature.

The plan
Instead of making a traditional portfolio with high and low-risk investments that are adjusted according to your tolerance and age, the idea is to make your loan payments in place of low-risk and/or fixed-interest instruments. This means that you will be seeing ‘returns’ by the lessening of your debt load and interest payments rather than the 4-8% return on a bond or similar investment.

The rest of your portfolio should focus on the higher-volatility, high-return investments like equity shares and equity mutual funds. If your ability (or willingness) to take risk is very low, the bulk of your investing money will still be going towards loan payments, but there will be a percentage that does make it into the market to produce returns for you.

Even if you have a high-risk tolerance, you may not be able to put as much as you’d like into your investment portfolio because, unlike bonds, loans require a certain amount in monthly payments. Your debt load may force you to create a conservative portfolio in which most of your money is being ‘invested’ in your loans with only a little going into your high-risk and return investments. As the debt gets smaller, you can readjust your distributions accordingly.

The big picture
It’s a one-point conclusion: you can invest in spite of being in debt. The important question is whether or not you should. The answer is very personal and can be determined on a case-to-case basis. There is no denying that there can be benefits from getting your money into the market as soon as possible, but there is no guarantee that your portfolio will perform like it needs to. Such things depend on how adept you become at investing.

The biggest benefit of investing while in debt is psychological. Paying down long-term debts can be tedious and disheartening if you are not the type of person who puts your shoulder into a task and keeps pushing until it is done. For many people who are servicing debt, it seems like they are struggling to get to the point where their normal financial life — that of saving, investing, etc — can resume.

Being in debt is pretty much a state of limbo state, when things seem to be happening in slow motion. By having even a modest portfolio to distract you from the tedium, you can keep up your enthusiasm with regards to finances. Knowing that the sun will come up and being able to see the dawn are very different experiences.

For some people, building a portfolio while in debt provides a much-needed ray of light. It is like your first day at the gym. You keep regretting all the sweets, and fried stuff that you ate. What you can now do is get on the treadmill and start the work-out!

PS: Did you know that your weight is a much larger function of what you eat and a small function of how much you burn?