The mistakes do-it-yourself Investors make when the going gets tough

The mistakes do-it-yourself Investors make when the going gets tough

The last few days have been unprecedented and will be part of stories which we tell our grandchildren. We have been proactively in touch with many of our customers over the last few days, to understand their worries and allay their fears. And we are pleasantly surprised by their typical response to the situation.

 

On the other hand, we get a lot of calls from DIY customers who want a sounding board during difficult times. They are looking for some advice, they are essentially gauging if they are on the right track. What we notice with a vast majority of them are the following

 

Read more about this in our latest article, published on Moneycontrol.

 

https://www.moneycontrol.com/news/business/personal-finance/the-mistakes-do-it-yourself-investors-make-when-the-going-gets-tough-5078681.html

 

 

Image credit: Moneycontrol

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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Dear woman, don’t be risk-averse in choosing your investments

Dear woman, don’t be risk-averse in choosing your investments

Last week, I did a financial well-being session at a well-known corporate, the participants being predominantly women in their 30s. While they were all keen on taking charge of their finances and made for an attentive audience, most of them were extremely risk-averse.

 

This was startling, since women, usually, are not in a hurry. They are very patient, and once they understand the way a product is built and have realistic expectations of the short-term as well as long-term performance, they wait out the turbulent times patiently and truly stay put for the long term.

 

Given this fact, it was surprising to see that most of the women mentioned earlier were shying away from equity since they perceived the volatility in the short term as risk. There are several compelling reasons for women to take more interest and understand the best options available to them when it comes to investing. Here are three big ones.

 

Read our latest article, published on Moneycontrol.

 

https://www.moneycontrol.com/news/business/personal-finance/dear-woman-dont-be-risk-averse-in-choosing-your-investments-4981251.html

 

Image credit: Moneycontrol

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Lessons in managing money from Test cricket as we get into the 2020s

Lessons in managing money from Test cricket as we get into the 2020s

In the last decade or so, the Twenty-20 (T20) format has overtaken the traditional formats of cricket, due to its shorter match-time, fast-paced and glitzy game, adapted rules to make it more interesting as well as in-studio add-ons. While purists may not appreciate these “dilutions”, they have definitely democratized cricket, taking it to newer audiences both in existing countries where cricket is played, as well as to more countries across continents, moving the game up several notches in the global rankings of universal popularity as well as revenues.

 

Interestingly, we have also recently entered the 2020s decade. With the dawn of 2020, another decade just passed on! Already 2 decades of the new millennium are gone and it has been a full 2 years since the 21st century turned an adult! With attention spans shortening and the pace of life and changes to it both getting quicker, it sometimes seems that even time is playing a T20 version of its game on us.

While this fast-paced “T20 version” of life can get addictive, its effects can be quite corrosive! It has never been easier to acquire “look-rich” symbols of wealth, with literally everything, including luxury cars, now available at the click of a button on “easy” EMIs. There has been a dramatic change in the way people have managed their cashflows (Income vs Expenses) in the last few years, and this is also reflected in the household savings rate (as a % of GDP), which is down to 17.2% in 2017-18 from 23.6% in 2011-12 (data source – Forbes India, 2nd Jan, 2020).

 

The newer generation of investors also think quite differently as compared to their previous generation, placing far more emphasis on the present and the here-and-now while being not-as-concerned with what the future holds. Apart from re-defining their needs, this thinking also stems partly from a much higher level of self-belief and confidence in one’s own abilities, as compared to what the earlier generation had at this age.

 

That being the case, in these changing times, does managing one’s money also evolve a-la cricket and have its own “T20” version of the rules? In my view some things will not change, especially lessons on managing one’s money. They remain universal and relevant, just like Test matches in today’s T20 age, and if anything may become more relevant in the coming uncertain and high-speed decades. So, what are some of those lessons that you can take from Test cricket, to manage your money in today’s T20 times? Here are 7 simple ones.

 

 

  1. BE PATIENT – Test cricket can be boring, and needs to be played session by session

 

Test cricket can at times put you to sleep, and definitely test your patience, with its long-drawn out game, and sometimes non-result-oriented approach. Similarly, managing your money well can also be, rather, needs to be boring, and is a long-term repetitive process, year on year, with regular reviews and course corrections.

 

The great Warren Buffett says “The stock market is designed to transfer money from the impatient to the patient.”

 

 

  1. MAKE FEWER MISTAKES – The winner is the team which loses fewer wickets than the other

 

This is one the biggest differences between Test cricket and the other formats, since victory goes to the more resilient team, one that loses fewer wickets than the opponent. Similarly, a very productive approach in investing is to make as few mistakes as possible, and definitely, lesser than the broader market.

 

Charlie Munger once said, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

 

 

  1. PROTECT YOUR CAPITAL – Defense is the best form of offence

 

The “test” in Test cricket possibly stands for a “test of a team’s defenses”, since the team needs to stay at the crease, ball after ball, over after over, without losing an unnecessary wicket. Similarly, being prudent with your money is about preserving your capital as well as possible for as long as one can, rather, it’s about maximizing returns with as minimum risk as possible.

 

In Anthony Robbin’s words, “Don’t think in terms of taking huge risks to get huge rewards, think about the least amount of risk for the greatest reward and be disciplined about that.”

 

 

  1. LOOK FOR CONSISTENCY – Boundaries are not as important as exploiting the field and running between the wickets is

 

A team that keeps the scoreboard ticking over after over, without unnecessary flashiness or risks serves its chances better. Similarly, a prudent investment strategy should make your money needs to grow consistently, with lower volatility, giving you much peace of mind.

 

Paul Samuelson’s advice – “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas”.

 

 

  1. ACTIVELY MANAGE ASSET ALLOCATION – Test cricket doesn’t have slog overs or power plays, instead, conditions determine how the game needs to be played

 

Test cricket doesn’t have pre-set match templates, needing one to score more in the early or late overs. Right from the decision post the toss, its about watching conditions and adapting your game accordingly. Similarly, when it comes to investing, there is no absolute good or bad asset class. Managing Asset Allocation on an ongoing basis is key to a stable and successful investment portfolio.

 

David I. Lampe reminds us what our parents also used to say “Asset Allocation is not that different from what mom told us growing up: don’t put all your eggs in one basket.”

 

 

  1. ADEQUATELY DIVERSIFY – Test cricket requires a full complement of quality players, each of whom is a specialist. In the shorter form, you can make do with pinch-hitters and all-rounders.

 

While in a shorter format, teams can get away in games with a few multi-talented players, in test cricket, even one weak link gets shown up over the course of the match. Every player is important and needs to bring to the ground specialist skills that will help the team prevail over the other. Similarly, a good investment portfolio is adequately-diversified to take care of risk (while not being over-diversified to dilute quality), and does not depend only on a few concentrated bets to deliver, while the rest of the portfolio underperforms.

 

Chris Lutz says “The purpose of diversification is so that when one investment goes down or is not doing well, you are insulated from the result because of the others you have in place.”

 

 

  1. STAY THE COURSE – Lastly, Test cricket is about winning the series. There can be comebacks, though difficult. Unlike in the shorter form, where one bad day can send you out of the World Cup.

 

Lastly, Test cricket is unique in that, it gives you a second chance. A bad day at work (or in the market) doesn’t send you home (or wipe you out). Similarly, Investing is about having a well-planned and adaptable strategy, not making catastrophic mistakes while learning from the smaller ones (not just yours) and staying the course even when things look bad.

 

Let me end with Peter Lynch’s wise words on staying the course “You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you are not ready, you won’t do well in the markets.”

 

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

 

Image credits: Rahul Dravid – Photo Division, Ministry of I&B, Govt. of India, through Google (labelled for reuse); MS Dhoni – Wikipedia, through Google (labelled for reuse)

With even banks failing, which asset class is safe enough for me to invest?

With even banks failing, which asset class is safe enough for me to invest?

The last couple of years have not been kind to investors at all. Equities (the broader indices) have near-crashed, debt mutual funds have also sprung unpleasant surprises, real estate has languished. And if things couldn’t get any worse, the so-assumed last bastion of safety for investors – banks, has also been breached.

 

In the last few weeks, two specific pieces of bad news has hurt investors and further spooked markets which already were like a cat on a hot tin roof. The first relates to the NPA woes of Yes Bank, and despite the repeated assurances of the management, investors are panicking and not only are its shares being dumped by investors and employees, there are anecdotal stories of FDs and even basic accounts being moved.

 

The second piece of news is far more chilling to the retail investor. The RBI suddenly froze all accounts and transactions of PMC (Punjab & Maharashtra Cooperative) Bank, a medium-sized cooperative bank, throwing its depositors and customers into serious emotional turmoil and financial crisis. It turns out that nearly 3/4ths of its loans are NPA (non-performing asset, which in simple words means – unlikely to be paid back, at least in whole), having been advanced to a single customer (in brazen violations of existing regulations), which has gone bankrupt. What is sad is that there seems to be not much hope immediately in store for the thousands of retail investors who had deposited their hard-earned savings in the bank, and whose monies and access to liquidity has got stuck all of a sudden.

 

This leads me to the titular question – “As an investor, which asset class is safe enough to invest?” While I am sure this question is on many investor’s minds, this question is better answered by flipping it and instead asking oneself – “As an investor, how much do I understand the risks?”

 

Let me explain further. Most of the time, investors burn their fingers because they invest without fully understanding the products and the risks that they carry. Usually the only understanding of risk that they tend to have is volatility, which they then convert into a perception of capital protection. Ie. Equity is very volatile, and capital loss can be significant. Debt is not at all volatile and is like an FD, therefore capital protection is guaranteed.

 

Unfortunately, this is an incomplete picture of the risks that the products carry. At a recent seminar I attended, a speaker used the iceberg metaphor to depict the unseen factors behind results (success or failure) and it is apt here as well. Risk is also like an iceberg. While some part of it is seen, many parts of it remain unseen. And importantly, as an investor, while it may not be possible to identify all the risks (ie. many parts of it will remain unknown), it is necessary to understand and estimate it, to be able to manage it.

 

Eg, In the case of Equity, volatility is seen as the primary risk, but actually that’s not the risk investors should worry about, since over the medium to long term, the volatility subsides substantially. That said, business risk (how will the company perform) and concentration risk (% share of the company in the overall portfolio) are important risk factors that need to be managed.

 

In the case of debt, investors have some understanding about interest rate risk, since they know that FDs when renewed may be at a lower or higher rate, depending on the prevailing interest rate. On the other hand, the general investor belief about debt is that capital protection is guaranteed, and hence one sees a bee-line for some of these corporate deposits or debentures, which offer much higher rates vs the prevailing rate in the market. Key risks that investors ignore in the case of debt are credit risk (what if the company fails to pay either the interest, or worse, the principal as well) and business risk (what if the company you are putting your money in has bad lending practices and hence sinks eg. PMC Bank).

 

So, leading back to the question we asked originally, unfortunately, the answers aren’t black-or-white. Investors would be prudent not to chase so-called “safer” asset-classes basis their past experiences. They should instead spend time understanding the risks involved and managing them. Your investment is safe only if you have taken the necessary and right steps to manage the risks involved in those investments. Managing the risks involve having the right asset allocation basis your (the investor’s) investment time-horizons as well as appetite for risk, identifying the right investments within each asset class, as well as making sure that there is adequate diversification, both across and within asset-classes.

 

While the above is not rocket science, having both, the right expertise (analysis and research) and pain-staking effort (regular review and course-correction), is required. And importantly, the need to “unbias” yourself while evaluating your choices and taking your decisions is essential. If you are new or busy, then having access to a trusted advisor will help you manage your portfolio better in terms of both risk management as well as adapting the portfolio to best suit your needs and goals.

 

To summarize though, remember – understanding the risks is key to determining safety of your investments. Without adequate understanding, even the safest-seeming investment can turn out to be super-risky, while with some level of understanding and risk-management, investors can navigate their way safely through even seemingly high-risk investments.

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

Image by MoteOo from Pixabay

My Equity Portfolio is down 20%! Have I made a mistake? What should I do now?

My Equity Portfolio is down 20%! Have I made a mistake? What should I do now?

The last 18 months have not been kind to investors in the stock markets. Depending on which period you are looking at, there have been severe corrections, across all market-caps. When mid and small-cap indices fell severely from their Jan 2018 highs, large-cap indices still held on and posted marginal gains. But post the budget presented in July 2019, they too have thrown in the towel.

 

So, how badly has equities done, and how much has it actually impacted investors? To put things in perspective, a diversified multi-cap index portfolio has fallen approximately 12%, both from the market peak in January 2018 (approx. 18 months back) as well as from the recovery peak in August 2018 (approx. 12 months back). The below table gives the details.

 

Of course, this varies across market capitalizations, with large-caps still managing to hold on, losing only between 4-9%, mid-caps dropping 18-22% and small-caps plummeting as much as 28-40%.

 

So, in such a situation, what should one do? Is the market likely to drop further, and if yes, should one exit one’s portfolios? Are equities not the right asset class to invest now?

 

In the short-term Equity is volatile. In the long-term, Equity builds wealth!

There are enough and more market news and views answering the above questions, with necessarily no improvement in clarity post reading them. I do not intend to add more to this confusion by also pitching in. Rather, in my view, the best thing to do in such situations is to go back to the “wise men” and learn from them on how to handle such situations. So, let’s see what five such wise men have to say.

 

 

You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you are not ready, you won’t do well in the markets – Peter Lynch

 

The first lesson is about having the right attitude to invest in equity. Be prepared to travel the roller-coaster ride that it will take in the short term and to be unpleasantly surprised despite precautions. Building the temperament needed to invest in the stock markets takes time, so invest only what you can bear and slowly increase it over time as you get comfortable.

 

 

The stock market is filled with individuals who know the price of everything but the value of nothing – Benjamin Graham

 

Markets gyrate excessively, basis the laws of demand and supply, which in turn are driven by sentiment, fueled by a continuous dose of “news”. If you have the temperament and the knowledge, volatility can be an opportunity. That said, timing the market is tough and not advised and for the average retail investor, these are the times when your SIPs and STPs MUST continue, and if possible, topped-up, to take advantage of rupee-cost averaging.

 

 

Only when the tide goes out do you discover who has been swimming naked – Warren Buffett

 

When markets take a dive, the natural response from a retail investor, even some of the experienced ones, is to sell the stocks (or funds) that are holding on while retaining the stocks that have crashed, since they want to “wait for it come back up”.

 

It is pertinent though to remember that in good markets, even the mediocre performers get “swept up by the tide”. It is when markets go down that these average performers get called out. Also remember, every growth cycle has a different set of dominant contributors. So, use downturns to get rid of your not-so-good stocks while retaining the ones that are still good, thereby building a future-ready portfolio. While the urge to wait for markets to come back up is high, remember, that the good stocks by then would have run up even more.

 

 

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent – Charlie Munger

 

Building a good, long-term, high-quality portfolio takes time and requires pain-staking effort. Make sure you are taking advice from a qualified investment advisor, whose interests are aligned to yours. But once done, sit back and enjoy the view. The key to benefiting from good equity investments is allowing them time to grow and compound. So, stay the course, and don’t take recourse to stupidity, such as exiting perfectly good portfolios just because the prices are down.

 

 

If you don’t know who you are, the stock market is an expensive place to find out – George J W Goodman

 

Lastly, investing in equity without having sight of what you are hoping to achieve, and over what time-frame, is fraught with risk. The danger is that since you do not know either, you will tend to over-track and get impacted by short-term volatility and performance. Anchor your investments to a goal, and you will suddenly see the big picture, and will not get swayed by what happens during the journey. A good financial planner will help you identify the right investments for your goals and will also help you course-correct over time, and ensure that your portfolio is always future-prepared, thereby allowing you to have peace-of-mind and enjoy the present.

 

In summary, use the below 5 inferences as guard-rails to both smoothen as well as make safe your equity investing ride.

 

1.     Build the temperament to invest in equity, by gradually increasing your investments

2.     Volatility is good. Ride it out, and if anything, use it in your favour through your SIPs

3.     Use downturns to clean up your portfolio and make it future-prepared

4.     Once you have a future-ready portfolio, stay the course, and avoid short-term decisions

5.     Finally, know why you are investing. Anchor your investments to your goals

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

To receive our articles through email, pl subscribe here.

For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

Image by Mediamodifier from Pixabay