Advantage small investors – SIPs

Affirmative action, asset allocation, compounding, Financial Independence, Habits, Uncategorized

This is a continuation on my rant for doing Systematic Investment Plans (SIPs)

A lot of times I hear my friends , especially female friends say this….. my father / brother / husband invested in a specific stock Rs100,000/- and the stock has never recovered back and he lost so much money, so I will never invest.

I have literally had to coax people to understand the fallacy of the argument. Losing massive money is an outcome of getting in the market without doing your home work. If you listen someone else and do your investment or you see the stock market going up and you throw a dart at any name and buy the shares then you are inviting trouble.

First and foremost if you don’t understand about the ways companies work, operate, don’t get into the market on your own. There are so many ETFs which you can buy or MFs you can get. This helps spread the risk over multiple stocks.

Second even within these always ensure you are buying regularly in small tranches. By using the SIP facility you get to average over time as well as cost so even the fall in prices is actually an advantage for you.

Unlike big investors who have to look for a big price advantage to invest their millions or billions, for the small investor this is an advantage. They can enter the market at any time because the SIP will take care of any gyrations that the stocks go through and will end up with a very large core inthe long run.

The key is that you are not investing lump-sum, you are investing small amounts and you are investing systematically and you are letting compounding play its role in the long run, then your returns will be similar to the overall market

In the LONG TERM, and this is a very important point, in the long term the stock markets have given compounded returns in double digits. If you can spare small amounts of money every month for an extended period of time, its mi days boggling to the corpus you can create. In my earlier posts I have given ready to use charts to help you compute.

However if your time horizon is short then its better to put money in debt instruments so you are sure about your returns. These returns are small single digits but they are guaranteed.

Take your first step, start an SIP and get financial independence.

Till next time.

Carpe Diem!!!

Burning bridges or keeping options

asset allocation, Financial Independence, Human Brain

I always have this dilemma, whether having options is the right thing or deciding on one path and dedicating all your energy and finances

There’s one theory attributed to Tariq ibn Zaiyad, who is said to have invaded the Iberian peninsula and ordered all the boats be burned after his troops landed.

The idea being if people don’t have an option left then they will concentrate all their energy in trying to figure out how to succeed within the constraints. In case people have an option they don’t put all their energy in solving the problems because they know they can go back to the other option.

The other way of l looking at it is that if we have too many options then we also end up being undecided and take no action.

A lot of investment gurus suggest that you should only focus on 10-15 stocks in your portfolio after you have identified the best stocks as per your risk profile. The idea is that it’s not possible to monitor more than 10-15 stocks. And the percentage of holding within these should be based on your conviction of growth so that you can get maximum returns. After that you should only focus on these for the long term and monitor them.

On the other hand you have people who say you should always have a safety net so that in case of a problem you know you can fall back

In the finance industry this is the concept behind ETFs and most MFs. so the returns are always averaged out to the market and there is a lower chance off loosing money. As Warren Buffet says the first rule of investing is Never lose Money and the second rule is never forget rule number one.

In my own operations I always have this argument with my peers when we are making the budget if we should only focus on one new initiative in a year and make it successful or should we have 2-3 simultaneously and see which moves. My opinion is that it’s very tough trying to ride multiple boats in parallel

Somewhere I think it may also have to do with bandwidth.

What’s your view. Would you rather go beyond the point of no return, choose only one option and make yourself a success or would you rather place bets on multiple things. I would love to heard your comments.

Till next time.

Carpe Diem!!!

Asset Allocation – key to balancing your investments

Affirmative action, asset allocation, compounding, Financial Independence

Yesterday I wrote about continuing with your Systematic Investment Plans if you have your job and avoind encashing your investments.

My wife and I were discussing on our own situation given that the market has gone down substantially and she was bothered her own investments would be totally messed up.

That’s when I explained to her the philosophy of Asset Allocation and why she need not be so worried about her investments.

While you will see that most of the articles I write are about investments in some form of equity where you own part of business, especially if don’t have one of your own. However I have mentioned this earlier and I will mention again that the way to financial freedom has to do with an asset allocation based on your risk profile.

In simple terms asset allocation is distribution of your investments in such a way that irrespective of the direction the equity markets take or the interest rates take you have your principal amount protected and growing at a steady state. In the picture above if the lady in the picture happens to see a dog come at her suddenly and drops the basket, all her eggs will break and all her effort in building her dish would get destroyed

So if you have $100 to invest and you have put all the money in equity, while in the long run it may give you around 12% or so, in the short run – like it happened in the last 3 months – it would have gone negative by more than 30%. By putting some of your $100 in term deposits of even 5% you would have ensured that your overall hit was averaged better. Its all about ensuring that “all your eggs are not in the same basket”.

No doubt that equity gives the nest returns in the long run and is also the most tax efficient in most countries, however not everyone has the risk profile to do the roller coaster ride that the equity markets go through. This would be true whether you have invested directly in stock yourself or if you have invested via ETFs or mutual funds. With mutual funds and ETFs the ride down could be less severe while the rise upwards could also be slower.

Its always better to have some amount of allocation of your money in debt like in term deposits or bonds. How much can better be judged by your personal financial advisor but have some portion of your total investments in some kind of debt. Fixed term bonds or deposits will ensure that you get a fixed return on the money invested irrespective of the situation in the equity markets. Even though the returns will be lower, an it may not be so tax efficient, the fact that it is a guaranteed amount makes your portfolio a lot more resilient.

There is a very good explanation on Asset Management in the book Money Master the Game by Tony Robbins. He has interviewed multiple fund managers on how they do the fund management of billions of dollars. Some of them also invest in things like commodities and precious metals and real estate. So its always better to consult a financial advisor before deciding on the type of asset allocation you want to do and the risk profile you have.

Yes bond markets also go through tough times and the bank, in which you had your term deposit, can also shut down, but the probability that all the things will go wrong at the same time is remote. Hence the concept of asset allocation becomes even more critical.

Government owned securities obviously are the most secure but they give the lowest interest, then come the bank term deposits and the highest would be the bonds in terms of interest rates. However as the interest rates climb, the risk also goes up.

Spread your risk by consulting with your financial advisor and move towrds your financial independence.

Till next time.

Carpe Diem!!!