This is not easy to think or accept. People who continued their SIPs would have also done badly – no doubt about that. Your opening portfolio (Jan 2011) would have been down, and so would have the SIP figure.

Obviously at this juncture we can ALL see the negatives and we all KNOW that the market will go down, do we not!!??. (Hey there are some readers who do not get the sarcasm, sorry). Well when on TV and other media you look at the ‘experts’ – their views are worth hearing…

-Markets will go down to 12000 (no clue why there is such a consensus for this number!) and the more optimistic ones are predicting 18000. Of course the very hardy, never say die guys predict 20,000.

Frankly I do not know what will happen.

However a bad year is rarely followed by a worse year (yes it has happened in the past, but I am taking a calculated call!)..which means a NEGATIVE 25% will not be followed by a negative year. So assuming that the index’s starting point is 15,500 for Jan 2012 (I am writing this on 2nd Jan at 9.30am and this is the current sensex), I think seeing the sensex at 19500 is not impossible. This means that the current year’s return would be about 25% – just wiping out the 2011 losses.

Will the Re – US $ be at 60? not sure. However if many NRIs start keeping their money in India (remember the rates of Nri deposits have improved) and the software exports do really well, we could see the exchange rate at 52 instead of 62!

Not guessing the sensex, but just punting on the fact that the IMMEDIATE past has NO BEARING on the IMMEDIATE future. Simple, is it not?

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Well for those who took up a job in 2007/8 (means born in 1985 or later) markets have not been a great – at best it has been lukewarm. All those who started a SIP in 2009 or later are still waiting to see some returns over the bank fixed deposit rates.

Those who listen to their ‘psu’ or ‘government’ oriented elders in the family even starting a SIP must have been difficult. Now they must be facing the wrath of the family saying ‘see your portfolio is down by 30% – in the bank you would have earned….’ blah blah blah.

So these kids are under tremendous pressure -on one side from parents who do not understand equity investments, media which loves action, and other classmates saying ‘see I told you not to listen to Subramoney (take your pick) see what has happened.

What should they do?

1. Remain calm: if you are investing for a long term (let us say for a goal 5 years away) just continue your SIP.

2. Remember if you look at equity on a daily basis, you could get scared – just stay away from the idiot box or the pink paper whichever is your mode of poison.

3. When somebody asks you to buy a Pension Plan, ask for the asset management charges. Recently one mutual fund has launched a Retirement Plan – and I have seen websites and ‘advisors’ doing a detailed analysis WITHOUT talking about the asset management charges. Did I say ‘It is difficult to make a person understand something if his livelihood depended on ‘not understanding it’ ? well here that is another problem…

signing off for now…:-)

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I F A grievances:

1. Clients are short term pleasure seekers: both the IFAs have been in the business for more than 10 years and have upwards of 500 SIPs running. Even clients who claim to have a long term view (will it become Rs. 10 crores in 20 years kind of questions) will suddenly stop their SIP and also withdraw their money.

2. SIP returns look less exciting over longer periods! – clearly mathematically challenged clients are difficult to handle. It is really difficult to explain to a client that a 14% p.a. return over a 15 year period is really a superior return.

3. If a client has increased the SIP amounts, the returns look worse!- so true mathematically. If you have done a Rs. 5000 SIP from the year 1999 to 2001, then Rs. 7500 till 2005, then Rs. 12000 till 2008 and Rs. 25000 from 2009 to 2011, the %age returns cannot look too good. This is simply because impact of compounding has been on  smaller amounts and markets are not at new highs!

4. Choosing the right amount of SIP is impossible: For some Rs. 2000 is right for 3-4 years. Once it becomes insignificant they either want to stop or withdraw the full amount. For some clients who do a Rs. 50k p.m. SIP suddenly the accumulated amount looks attractive to make a down payment to buy a house! There is a complete refusal to do a focused event based investing.

5. Neither is the investing scientific nor is the withdrawal scientific! – Suddenly when the markets are down there is a need for ‘doing some attractive equity deal’ or an ‘attractive real estate deal’. Here the easiest money to withdraw is the mutual fund accumulation – so out it goes. This is also because the LIC agent says ‘there is an exit load’ or ‘it is a loan’ or ‘it is an assured return scheme’ – simple words. Customer signs a form or goes on the net and withdraws the mutual fund accumulation. Simple.

6. There are too many people who the client listens to: Immaterial of how good the mutual fund adviser the client listens to the whole world. Blogs, magazines, television, neighbor’s dog, dentist, doctor,….and does something stupid. When it comes to calculating returns, the schemes are blamed. LOL.

7. Clients are impossible to handle Sir: this was the scream of an agent, and I really pitied the agent. When the agent suggested a scheme, the client invested Rs. 5000 in a SIP – and the fund did well over a 4 year period. The client said ‘you did not say this fund will do well or else I would have done a Rs. 25k SIP’. Vow!! this client needs a Nostradamus perhaps?

8. ‘The businessman investor is led by the CA’: Completely agree with the IFA! The CA says ‘do not do a SIP for more than Rs. 16,200 p.m. – we will have to get more details. This forces the IFA to look for 12 schemes for investing Rs. 200,000 a month. I do not think with all my experience I can think of finding 16 good equity schemes for such a paltry amount!

sure there could be more…..but that is for another day!

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Too many pundits and journalists jump to declare ‘The market is now in a bear phase’. My left foot. None of us know whether the market is in a bear phase or in a bull phase. The day I finish saying the market is in a bear phase, it can go up 5% and make my prediction look stupid. Even if it was a bear market which pundit knows whether it will remain there or will it go up?

The whole market argument (or rather pundits argument) about bear market and bull market is completely futile and absolutely useless. Markets always have good shares to buy and bad shares to sell. Check your portfolio – see what is worth selling off even today because the management is not good or the products are not selling. Shares like Gillette, ITC, P&G and Colgate also loose sheen when the markets are doing badly. However these companies are NEVER available at a price earning multiple of 10 – if that is what a bear market is supposed to mean. Does it really matter that the index is at 18000, 17500 or 15500 – but the shares that YOU want to buy are still quoting at a price earning ratio of 28 – albeit lower than 31? If you were a buyer at 31, you can buy more at 28!

Strategy for bear markets:

Let us assume that we are in a bear market. Should you rejoice or feel sad? Well depends on whether you are in an investing mode or you are in a withdrawing mode! Most people I know (from age 23 to age 84!) are still in investing mode..so a bear market (or a market are depressed at the current stage) is a blessing. I have no clue which share is a good buy and which is a good sell ..but if you are in such a doubt pick up an ETF of the sensex or the nifty.

Pick a real low cost etf (if you are aggressive pick the Sensex etf and if you are not so aggressive pick a Nifty etf). If you are already an investor in a mutual fund, just pump in some money into the funds that you are already investing in.

A SIP is a good idea, but so is picking up some stocks which you understand…However I do not think markets are at mouthwatering levels for many shares, so please be careful…Remember roses are surrounded by thorns!

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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?

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Financial Literacy and Financial Inclusion.

What you do is not so important! I have heard of an organisation where a person in a grievance cell also has targets! When the customer comes complaining, REPLACE the product, and make sure he/she does not go to the regulator!

SIP is a word which I thought everybody understood – but the financial services industry’s ability to reinvent itself is amazing. So daily SIPs, weekly SIPs, were introduced.

Then SIP in direct stocks was introduced – so a ‘why do you want to pay fund management fees’ …then a lot of nonsensical shares were given as a ‘portfolio’. Now the mantra is ‘averaging’ on a share – so that you keep buying more and more as the price falls.

Then of course they introduced ‘Safe Investment Plans’ – a ULIP which kept your family safe – even if you did your money will not be safe….because of the charges!

So if there is a fight between people who are teaching vs. people who are selling – the chances are that the people who are ‘educating’ or ‘teaching’ stand  no chance in hell. I think the budget of the ‘teachers’ vs. ad budget of the sales guy is 1: 50 billion….comments welcome!!

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This is a topic that I have spoken about too many times in the past….One of the steps required is to create different and various sources of income.

For a beginner who is starting on a first or second job how is he/she expected to create a second or third source of income?

Well at age forty if you want your Income Side to look like this:

Job 1

Job 2

Running a website on what you love to do

Writing articles on topics of interest (for which people will pay!)

Rent / Interest

Dividends

you have to start at age 22!

Well start building a portfolio – just make sure that you do as well as or better than the fund managers. If you are not confident of beating the fund managers, LEARN. Or go to the organized fund management industry a.k.a mutual funds. Unless you have to invest more than a couple of crores, or you wish to invest a lumpsum for a long time..SIP is a good route.

Seek a second job if your first job is not so great – or make the first job so great that you make enough money!

Clearly if your goal is to create the 3rd and 4th categories of income you need to buy some real estate (which can be rented out, not used!).

By the time you are 40 your dividend income, rent, and other so called ‘side’ income will be at least equal to your earned income.

By creating this multiple streams of income you develop the guts and the cash flow to tell your boss ‘Hey …I am not coming from tomorrow’ or like a friend told his boss:

“Thanks to my investment management capabilities I have created a dividend stream 4 times my salary. I live on about 1/10th of my post tax income. On the basis of my current lifestyle I have enough income and wealth to live till the age of 140 years. However as my performance has been the best, give me a bonus which makes me feel good…or I just walk..not for the money, but because I am sure the market will pay me more – as a mark of my ability”

So go and create multiple sources of income…it helps!

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It’s one of the basic rules of thumb: The more years you have to recoup losses, the more aggressive you can be. Unfortunately, the math isn’t so clear-cut. While the odds of losing money shrink as the years go by, the worst-case scenario – you keep on losing – just gets worse and worse. If holding stocks for the long run really did make investing safe, mutual fund companies would gladly guarantee your balanced funds. They do not. Now you know why!

“We are all great at excel sheet creation and equity share analysis, but we put out money in Bank Fixed Deposits” is the statement of a top regulator who obviously remains anon.

Here’s a different way to think about how aggressive your total portfolio should be: Imagine that it includes not only shares, real estate, and bonds but also your human life value, meaning your ability to earn income by working. In most cases your ‘earning ability’ will be your primary asset for much of your life. The safer it is, the more chances you can afford to take with your other assets – that is, your ‘other’ or balance portfolio. The confidence that the ‘earning ability’ will repair any damage that you do to your portfolio is perhaps the greatest asset that younger people have. They do not realize that this ‘overconfidence’ allows (or makes) them commit mistakes like investing in poor quality assets without worrying about the capital destruction that they are doing to themselves.

Now, this cannot lead you to conclude that time no longer matters. When you’re young, after all, the value of your earnings potential far outweighs the balances in your portfolio. As you age, say beyond 50 the value of your human capital declines, and you’ll need to secure more of your investments. Though this age differs from profession to profession – doctors need to worry at age 65 and sportsmen at age 32!

So the conventional advice to hold a lot in shares when you are young and gradually trim back can still make sense for normal people. However it has to be tweaked depending on the profession. If you are in financial services, start worrying about the Human Life Value – that calculator has been recently scrapped by IRDA!
Tenured professors and Central government employees have human capital that resembles a triple-A-rated bond, especially when they have a solid pension plan. Those lucky souls can (not saying should, note) dive aggressively into equities and even stay there as they approach retirement. The human capital of a commission-based life insurance agent or a mutual fund salesman, on the other hand, is pretty clearly a B group share – and it’s not a blue chip. That person should own a fair amount of RBI bonds, even when young.

What to do?

Assess your human capital. A typical person’s income is like a balanced fund – some portion you are confident 70% like a bond and 30% like a share – like a pension fund! Use that as your base and then think about how long you’ll be working, the stability of your current job, the industry, is your boss Hari Sadu, and your ability to change careers if you have to. You may have seen in the past few months the past few months that your human capital is not as secure as you once thought. If you’ve been an aggressive investor, that alone may be a reason to shift more of your assets to safer ground.

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Warren Buffet made most of his money by staying and investing in the USA. Late John Templeton made most of his money by betting on markets world wide. He was in Asia, he was in commodity stocks..all over the place.

Which strategy works? And the fact that a strategy has worked well from 1977 to 2007 it does not mean it will work from 2007 to 2037.

If you read what John Templeton says, you will believe that you need to create a diversified portfolio – a little of Japanese stocks, lots of American, some emerging markets, etc. in equity alone. Apart from this some debt – short term, long term, etc.

Warren Buffet on the other hand says you should concentrate your portfolio if you wish to create wealth.

Whom should you listen to?

Both!

You should have a concentrated portfolio – which means in the Indian context, if you have a Rs. 25L portfolio you may not need more than 6 companies. However, once you have created some wealth, you need to protect a portion of it from the vagaries of the market.

Let us take an example. In case you had invested Rs. 10,000 in Wipro in the year 1980, today it would be worth Rs. 350 crores (assuming you consumed all the dividends). However, at various stages you would have sold some part of your wipro shares to invest in other companies too – now if WIPRO had not done well, but some other company in which you invested (say Silverline) had done well, you would have looked smart (but actually you were lucky, simply, lucky).

However if you are still holding on to ALL the shares of WIPRO, it makes sense for you to sell a portion of WIPRO and invest in a simple index fund, some real estate, some rbi bonds, etc.

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The answer is very simple. Merchant bankers are a nice small clique who also run PMS schemes. So when the ‘Investment Bank’ goes to get a mandate they flaunt their strength in:

a. The retail brokerage network that they have built

b. The HNI clients that they cater to and

c. The PMS services that they run.

Now all these activities actually become some kind of a backward integration for their brokerage business. Thus these clients are told – here is L&T a great company and at an attractive rate of 8.5%. Gilt is not far away at 8% – and for senior citizens there is the senior citizen yojana at 9%. Of course their own executives were busy filling up forms of Mahindra Finance which was at 9% not very long ago.

So if your PMS provider runs a full fledged business in other finance areas, you are likely to buy some of those lemons or violently churn your portfolio. If you must go to a portfolio management service what you should be looking for is:

a non broking PMS provider – whose only income is PMS fees. There are 3-4 such providers in Mumbai and you would be better off with them. One name which immediately comes to mind is Chetan Parekh of Jeetay Investments. However like all sensible people he does not offer ‘PMS’ at Rs 5 lakhs. Parag Parikh is also a PMS provider – but he perhaps runs some brokerage business as well.

In fact the financial planning business does not conflict with thePMS business. However as a planner it makes sense to stick to Index etf as a recommendation instead of pretending tobe able to find the next WIPRO or the next INFOSYS.

Let us leave that job to Vallabh Bhansali of Enam or Rakesh Jhunjhunwala of RARE to do it. Amen.

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