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!!!

Keep your Systematic Investments Plans (SIPs)

compounding, Financial Independence, Human Brain

The market has gone down and rebounded. That’s the way the market behaves. You don’t know which way it will decide to turn. However the pandemic is real. People losing jobs is real. But more than anything else is the fear psychosis that things will never come back to normal. The media keeps bombarding you with news about the number of cases of Covid 19 which have grown by the hour.

Fact is that the media earns its money by playing on people’s fears. The pandemic is real there’s no doubt. But the human race has always found solutions to the toughest of problems. Ingenuity of human beings is directly proportional to the number of human beings (Julian Simon the Ultimate Resource). Today when we are more than 7 billion people on earth, we have much better lives than when there were 1 billion people on the earth. Sometimes it takes a little longer sometimes not so much.

This virus has been playing games for sometime, and the vaccine is still seeming elusive, so yes there is a lot of uncertainty. But already in most countries we have been able to now reach numbers of people getting cured and getting reported at almost similar levels. A lot of pharma companies are talking about having a vaccine ready by September this year (2020).

So now let’s get to you. If you still have a job – congratulations. You may have the job with reduced salary or normal salary. I don’t know your exact situation. I hope you and your family are safe and healthy.

If you don’t need the money immediately don’t encash your investments – the world will not come to an end. If you can somehow last these next few months without encashing your investments, then you would reap tremendous benefits because compounding will always play a role – Covid or no-Covid. If you let the compounding equation work uninterrupted you will have created a base to hit your financial freedom. If you have just started your investment journey over the last few years, you may not think that there is too much you have been able to accumulate. That is the way of any exponential equation as you will see from the graph above. Its only after the 15-20th period that the numbers suddenly explode. So staying the course till you hit that 15th period or near about is the key to your financial freedom.

In the long run the stock market in India has given 12-15%. So if you have SIPs going on – then when the stock market crashed couple of months back you would have been able to buy a higher number of units with the same amount of money, which means you would now have a higher number of units on which appreciation will happen when the market goes up. And markets in the long run have always gone up. In India because of higher inflation they have been at 12-15% average while in the US it is lower because of lower inflation.

The same logic would hold even if you have Fixed(term ) deposits. If you have a recurring amount getting deducted to invest in a term deposit, please continue similarly. Don’t let the compounding equation break. You may think you will restart later, but the later never comes…..that’s pure human nature.

So whatever investments you have been able to make, keep them as far as possible so that you are on the continuum to take advantage of the compounding equation

Till next time.

Carpe Diem!!!

Law of compounding – for real life improvement

Affirmative action, compounding, Human Brain

I read – maybe 10 years back – Delivering Happiness by the CEO of Zappos – Tony Hsieh. I don’t quite remember everything in the book except that it was the journey of Zappos. However there is one statement from the book which Hsieh makes, which has remained with me since then, if you can improve even 1% everyday, imagine the improvement you will have at the end of the year – 367%. However inspite of having read it and also put it on a board where I could see it everyday, I have not improved 3670% in the last 10 years. The idea is simple I understand it but I still don’t go about achieving it.

The Japanese have a incremental improvement method called Kaizen which is about bringing about small incremental improvements continuously resulting in massive improvements over a period of time.

Both seem to be very simple concepts but we don’t end up following them. If you have been following my blog for sometime you would have noticed that as I am getting more experienced at writing things I am also questioning things about how I can be improving myself. Right now I am working on improving my reading capabilities. I have an agenda to read at least 3 books every week, consistently over the next few months, inspite of all the extended working hours we are having due to the lockdown. I want to check if I can improve my reading, which means I gather more knowledge, which then I try to put into action and therefore improve myself on a regular basis.

Yesterday however I was watching a YouTube video of Dan Sullivan of Strategic coach and he explained a very simple concept because of which I may not be achieving our goals for real life improvement. His logic is that there are no impossible goals, there are only impossible timelines. And because we give impossible timelines to ourselves, we end up messing up on achieving our goals. In case you are interested you can watch the video here.

As per him if we were to give ourselves long enough timelines, then our brain will not put barriers. The timelines he talks about doing a 10X is 25 years and breaks it down into quarters. So in 25 years there will be 100 quarters. If we were to use our compounding equation S=P*(1+r/100)^n. So if we put P=X and S=10X and “n” =100 then “r” turns out to be just 2.5% growth per quarter.

Is it feasible to improve 2.5% per quarter or less than 1% per month. Should be possible. If we were to break down our improvement points into clear bite sized goals then 1% per month should be very feasible and 10X in 10 years should also be feasible.

The reason this compounding works is because as a human being when you improve the first time, the next improvement is over the previous improvement and this cycle can continue forever. This is exactly how compounding works on your money and this how compounding works in real life as well. However our brain is conditioned to think in terms of linear activities. It is just not capable of comprehending non-linear equations like compounding and therefore whether it comes to money or self improvement our brain plays games with us.

Its one of those laws which are universal in nature and should apply to me as well. If I can improve by more than 1% every month in different areas of my life, based on the knowledge I acquire by reading the books and taking action, I should be able to grow. Let me see how this goes. Just to share the progress in the last 3weeks I have been able to complete 8 books. All non fiction books. These include Crushing It by Gary Vaynerchuk, Bold by Peter Diamandis, Attackers Advantage by Ram Charan, Triggers By Marshall Goldsmith etc. All these books are quite dense, as you will see in the picture, but I am trying to keep to my target.

Let me know if you also see Compounding in other areas of your life. I will be very interested in hearing your story.

Till next time.

Carpe Diem!!!

Investment Strategies for Young Girls – Part 4

compounding, Financial Independence, Youngsters

In the first three parts (Part 1, Part 2, Part 3) I covered the basics on interest rates and compounding, then about taking insurance at all costs and then in the last one I spoke about keeping a base income of 3 months in liquid assets which can be taken out immediately. In the last post I spoke about eliminating Credit Card debt.

Today I will talk about student debt as the next biggest killer after credit card debt.

I read a wonderful blog post by Wintery Knight (you can read it here) about how student debt is such a big issue and even a cause of divorces in some cases. What was more poignant in the post was that women ended up taking up student loans and in general did course which ended up in low paying jobs, so paying off the loan took an even longer time.

When I started writing this series – investment strategies for young girls – of blog posts I did not have this kind of data. I was writing more from the fact that most of my sisters, female colleagues, team members were always working very hard, but when it came to finances, they preferred to avoid thinking about it. The result is that a lot of these young women work hard and earn a lot of money but because they don’t know the investment strategies, they are not able to make money work for them.

The thought process – finances, money, maths are things which are better handled by their father/brother/husband, I thought was something more pronounced in India where because of cultural issues women did not think about money, finance and maths.

However the data sources in the Wintery Knight’s blog show that this is an issue even in developed countries like the US. So somewhere maybe the conditioning we give our girls right from their childhood, in all cultures, is a reason for this issue.

So let’s get down to solve this issue of the education loan crisis. If you have done what I mentioned in the first 3 posts and you still have a job, then make it a habit to pay 1.6 times what ever you paid in the previous month/year. So as an example if in the first month / year you pay out $100 then in the next make an effort to pay $160 or as close to $160 as possible. In the next month / year pay 1.6 times of $160 and so on. This is going to use the Hemachandra-Fibonacci series that I wrote about in my blog here…..

This way you will break the ability of the finance company to compound interest on your pending loan amount. Negotiate hard with them to ensure they don’t have a problem with you increasing your monthly/quarterly/yearly payments by 60% in every period(monthly/yearly/quarterly). The more you reduce the amount of principal at the earlier stages of your loan tenure the easier it will be payoff the loan faster.

Now this is going to be tough for the first few years where you will not be able to go out for parties and may not have the money to even buy expensive dresses and cosmetics. You could also however do some freelancing alongwith the job and increase your income ( we will take this up in a separate post).

Entrepreneurship is obviously the fastest way to wealth, but with a loan sitting on your head, it will be advisable to ensure you clear that out at the earliest and also gain experience on the way.

From the next post I will start writing about how you can utilise the laws of compounding to your benefit.

Till then – Stay Safe and Carpe Diem!!!