Investments as confidence builder

Financial Independence, Uncategorized

I have been writing about how investments can help in getting financial freedom. Have written extensively on how even a few percentage points of differences can make substantial differences in your earnings in the long term. Have also shared about how having different buckets of investments can also help you plan your vacations or other activities, which can make you happy.

Yesterday I was reading a book by Dean Graziosi – Millionaire success habits. While this book is not about investing styles and strategies, I would highly recommend you reading this book for the overall enhancement in the quality of your life. It helped me identify a few blindspots which I didn’t know I had.

In one of the chapter’s. he talks about stacking some money from whatever you earn to increase confidence. This was a new take on a topic dear to me.

I have also written earlier about how even very small amounts invested over long periods of time can make you wealthy, because the amount is never the issue…. it is the duration and the interest rates which determines how wealthy you can become.

Dean’s logic is that when you stack even small amounts, it gives your brain the satisfaction that there’s money for a rainy day and therefore you feel better, more confident and your decision making improves.

I would think confidence is a precursor to multiple things other than just pacifying your hyper active brain and taking decisions. When you are confident, you are buy definition not fearful. As per a study human beings have 70-80 thousand thoughts in a day out of which more than 70% are negative thoughts. Since our brain still has “fight” or “flight” response to most things these negative thoughts spiral into some of the other kind of fear.

Fear can be from you losing your job to your health to speaking to an unknown person or speaking in public. Most of the fears however boil down to either not having money (food) or health which are the most primal fears going back to the time when we lived in forests and hunted for food.

By stacking money and investing it you can give your brain positive inputs so it does not go into the fight or flight mode.

In addition the compounding equation starts playing. An ideal way to do this would be putting regular amounts into SIPs from mutual funds or into SIPs of ETFs. You can start SIPs in India from as low as Rs500/- (USD 7/-) per month.

Most people, like Tony Robbins says so often, over estimate what they can do in one year but under estimate what they can do in a lifetime. This Rs6000 (Rs500*12months) will become close to Rs100,000/- (USD 1500/- ) if invested for 20 years at an interest rate of 15%. If every year they were to invest a similar amount, then after the 20th year, EVERY YEAR, even if they don’t invest anymore they will definately have Rs100000/- coming without effort and securing their future.

Now if you know that even the small amounts of money that you are stacking will ensure your future, you would be able to take on your “present” with more confidence. And if you make your “present” better, your future will automatically turn out to be better because your future is based on the foundation of your “present”

Habits

Financial Independence, Uncategorized

I just finished reading the book The Power of Habits by Charles Duhigg.  I had bought this book long back but it was lying on my Kindle… forgotten.

It has been my habit, that whenever I saw a new recommendation, I ended up buying the book.  Especially so when it was available on Kindle because then there was the instantaneous gratification of having the book in my possession.  This was not a good habit because I always had a huge backlog of books to be read.  Now I have taken a sabbatical from buying any more new books, till I finish the complete set lying on my bookshelf as well on my Kindle.   I haven’t bought a book in 3 months and I have a feeling that I may not need to buy for another 6 months because of the backlog.

This book is a very interesting read and Charles shows with very interesting examples of how it’s very difficult to break a Habit He talks about the loop – “Cue – Habit – Reward”.  If you are not cognisant of this loop you cannot change behaviour.

Recently on ETNow there was a news item which mentioned that the amount of SIP flows had not changed dramatically even-though the stock market had been faltering over the last 12-18 months.  {If you have been following my posts then you would know that a SIP is a Systematic Investment Plan where money is directly debited from your bank account every month automatically}

This news item came as I was finishing this book and it got me thinking – is it that the flows have not reduced because of a habit as Charles Duhigg says or because of inertia or because the investing population in India has become so mature that they realise that in equity investment the short term rise and fall of markets have little significance.

Only one of my friends asked me, if she should change the scheme in which she had the SIP to another scheme for the SIP.  She did not mention about stopping her SIP.

I doubt if the population investing in Mutual Funds has become more mature.  This could be pure conjecture but the SIP culture in India is not more than 5 years old.  So a population maturing in 5 years becomes doubtful.

What could play is that people have inertia. So they do not go to the mutual fund agent or to the mutual fund site to stop the SIP.  My wife I think is from this constituency and the fact that I keep telling her that equity is for long term.

After reading the book I realised that there could be a third play here.  The media and the association of mutual funds has made SIP investing more like a movement. Now as Charles points out, once something becomes a movement then it creates leaders from individuals at the community level and the movement keeps going from strength-to-strength.

He gives a clear example of Rosa Park and Martin Luther King and how that one incidence in the bus and the links that Rosa Park had propelled the civil rights movement in  the USA.

I have a feeling something similar is happening here with the SIP movement.  Since people in offices and homes are now all talking about SIPs there will be a lot of peer pressure on a person if she thinks of shutting – off their SIPs.

Another thing which I think could be happening is that since the individuals have got into the Habit of living on a smaller amount in the bank, they do not feel a pinch if the amount they have out into a SIP does not appreciate for a few months.

Due to the amount of SIPs continuing the amount of money coming into the stock market has not fallen dramatically.  Due to this the market has not fallen because when the foreign institutional investors take money out the domestic institutional investors keep buying.

the AMFI and channels like ETNow need to be congratulated on creating this movement with their sustained initiatives in India.

Do you know of any such movements for creating a better financial future in your country…I would like to hear.

Till next time….

Benefits of SIP – nothing to do with the image above

Financial Independence, Uncategorized

I am a person whose attention span is very limited.  I end up getting attracted to the next bright object all the time.  It’s extremely easy to distract me.  Due to this, even in my office I have taken a room which is in the corner so that my distractions are limited.

Whether its books – my other hobby – the moment I am given a reference of a new book, I end up buying it from Amazon for my Kindle.  I have more than 30 books which I have bought and not even started reading and there would be another 30 which would be in semi-read state.  This does not account for the number of physical books that I have which are lying unread and semi-read, in my book-shelf.

Similarly its with investments.  I see a new theory or a new company or a new investment avenue and I start researching it on how I can benefit from it.

That’s where the benefit of investing via a Systematic Investment Plan (SIP) comes in.  It’s forced money which gets deducted from my bank account.  And since I don’t want to get a message saying that the SIP was not executed because of a lack of funds, I end up ensuring that there are always enough funds to cover my SIPs.

I originally started my SIPs with just Rs1000/- per month in 2013.  Thats about USD16/- that’s all.  Over a period of  time I have been increasing the amounts in various mutual fund schemes.

While I was investing in the equity mutual funds, I was also studying some of the good companies.  I read a whole lot of books on this – I have shared names of the books in an earlier post – and took every opportunity to watch videos on Youtube where legendary investors shared their knowledge.

Once I was able to analyse some of the good companies which had good management, I started SIPs for those individual stocks, again with very small amounts.  The “kick” of investing in individual stocks is

  1. I don’t have to pay a service charge to the mutual fund manager.  The 2.5-3% service charge that they take for managing our money can substantially reduce the overall wealth you can create.  I have shared complete tables of these calculations in earlier posts.
  2. When the company declares a dividend or gives bonus shares then the pleasure I get is immense.  This does not happen when you have mutual funds.

Having mentioned the two points above, I still have a lot of SIPs going into mutual funds, because I am not in a position to identify mid and small companies on my own because of paucity of time.  Having a fund house do that for me makes more sense even if they are charging me a percentage, which eats up into my returns.  Once I take my retirement, I intend to even do this on my own.

Another psychological advantage of SIPs is that your brain now works to live within the limits of the money which is leftover after accounting for the SIPs. This is a very important factor for people like me who end up choosing the next bright object.  This keeps me focused on ensuring that I take up any new adventure only after I have paid for my SIPs.

From a financial perspective SIPs ensure that you get the advantage to being able to buy more when the price goes down thus ensuring you take advantages of the draw down in the market.  On your own you would never be able to time the market so well.

I even started a few SIPs for my son so that he gets the advantage of age on his side.  Even to my friends, I force them to start these for their children at as young an age as possible so that they get the power of compounding on their side.

Whatever your age or whatever you earn, you can start investments into a SIP and make your money work while you sleep.

Especially women (and girls) – they have this big “mindblock” on not knowing finance.  With a SIP you don’t need to know anything about finance or stocks.  You just need to tell your financial advisor about the amount of risk you are comfortable and she will suggest a scheme for you.  You could also go to sites like valueresearchonline.com or moneycontrol where they showcase the risk ratings of funds.  You could just choose from any of those.

Till the next time.

Carpe Diem!!!

How much do you actually need for retirement

Financial Independence, Uncategorized

I don’t know the answer. For each of you it will be different.  So you need to find it out for yourself.

So why this post.

Recently I was having lunch with one of my colleague who is just crossed 60. He was talking about how he had a discussion with a relative on what is needed after retirement.

So he had the following calculation:

If he needs Rs100000/- per month then he will need Rs12,00,000/- in a year.

If he is in the 30%+ tax bracket then he has to account for tax, which means he should make approximately Rs18,00,000/-.

If he has a fixed deposit which will give him 7% RoI then he will need a corpus of Rs26,000,000/-. Now since he is no where close to this figure he was getting depressed on how he will handle the situation.

For all of you who live out of India, the retirement age in India in most offices is either 58 or 60. Some jobs do have 65 as the age.  Private companies do have people working after the age of 58 but that is on contract, not as a full time employee with all the benefits. Even in India the average age of both males and females has been going up every decade. In the cities especially with access to better medical treatment, the average age has crossed 70 now.  Which means a lot of people in the cities will now live to cross 85.

Being an absolute optimist I highlighted a few things that were flawed in his argument.

  1. The tax rate is different once a person crosses a certain age level in India.
  2. 30% tax on the whole amount does not include the deductions which the government allows as standard to all citizens.  So the taxation is rarely on all your income.
  3. While its good to have a large portion of your money in a fixed deposit, so that you are saved from the fluctuations of the stock market, it does not mean that you should have all your money in such low interest yielding paper. There are a lot of decently safe options which could give you safety as well as a higher rate of interest.
  4. You need to account for inflation especially medical inflation in India which is going crazy.
  5. You need to have a financial advisor who can suggest you ways to come into the lowest tax bracket.

If you were to take all the above items into account then the figure may not be the depressing number of 26,000,000/- given above.  It could be almost 30-40% lower.  That got my colleague a little relaxed.

Having given the above example however the fact remains that after retirement, you may want to travel across the country or abroad.  How do you finance those spendings?

For an India perspective, I would suggest you read the book by Saurabh Mukherjea Coffee Can Investing.  He has taken some very specific cases and built a hypothesis of how you should be investing to get to spend your old age well. At a broad level his belief is that for taking part in the stock market without risking majorly, ETFs are the best bet because they have low expense ratios(in one of my earlier post I have shown how an incremental 1-2% difference in returns because of expenses charged by mutual fund houses can impact your returns dramatically).  However for the small cap stocks he still recommends using some of the renowned mutual funds.

For all my readers from the US and Canada, I will not tire of recommending Tony Robbins’ book Money Master the Game.  Its a thick book but it’s a book which will give answers to a lot of your queries.  Most of the so called advisors don’t answer the questions adequately well.  Tony has been able to get you answers from some of the best people in the world who handle trillions of dollars combined.  He has also given a perfect asset allocation breakup.  Also all the advisors are very clear first on not losing money.  And last they all suggest index funds again because of low expense ratios.

All of us have to retire one day. Death and taxes are the only 2 realities of life.  How you manage your taxes and investments so that you live well, till you die. The earlier you start investing the better off you will be in the later stages of your life.  I have been giving various examples of how compounding can do magic even if you don’t earn much – if you start early and invest in decently size returns.

Till next time then…find out how much you would need to retire and then work backwards to achieve it.  Have a life.

Carpe Diem!!!