A friend was talking to me recently about an interaction he was having with some others, where there was a furious debate on about where to invest, as well as which asset classes including geographies would deliver better returns going forward. As you would agree, this particular topic of debate is not uncommon at all and today’s information-empowered world has led to both more aware investors as well as more confused investors.
Investors usually seem overtly focused on “returns” and are always keen to know where to put their money next. This is especially so during a bull market, and when the recent past has given very good returns. But, excessive focus on returns is usually a function of “not enough focus” on a few other important yet ignored aspects. Focusing adequately on these other aspects leads to enough and more clarity on which asset class an investor should choose and what “returns” the investor should expect going forward.
Are real life situations and financial decisions assessed for risks in a very similar way by investors? There are parallels but they are not always handled similarly. Here are some anecdotes with some pertinent personal finance lessons, that helps us understand the differences in the choices people make in real-life situations, vs managing their money.
Read our latest article, published on Moneycontrol.
Enough has been spoken about the markets in last few months, including the never-seen-before kind of drops and recoveries. In such times, one would have assumed that retail investors would have beaten a hasty retreat, hoping to come back when markets seem a bit saner.
Surprisingly, that is not the case. The below 2 published data points indicate otherwise.
New demat account openings for most brokers have surged, with anywhere between 50 to 200% increases being reported, many of them first-time users.
Retail investors took advantage of the available time (due to the lockdown) and the valuations (in March & April post the ~ 35% crash) to enter and invest in the stock market to make some “quick” returns
Considering that the bulk of these new additions are online, it can be presumed that the average new investor is young and technology-savvy, while not afraid to take risks while seeking to make a quick buck
Is this good news? Well, it depends on how one looks at it. History indicates that institutional investors are generally smarter than retail, who usually enter late to the party. The average holding returns of mutual funds is significantly higher than the average investor returns in the same funds, underscoring this fact.
On the other hand, the fact that the market participation is broadening and that too in times of market distress is heartening and shows some maturity in the mind of the average retail investor. This millennial generation is possibly different and smarter than its precursors. They are also adopting the new “do-it-yourself” way, already popular in developed countries.
That said, trading in the stock market for short term gains is fraught with risks, and can result in substantial capital loss, if one doesn’t have a good hang of what one is doing. Having an Investment Framework based on the following 4 levers can possibly help today’s investor to increase his or her chances of success in the stock market.
Strong Knowledge-based Investment Hypothesis
Know each stock you invest in. Spend time on research, make sure you understand the company and its prospects, and do not get lured by tips and penny stock advice. This is fundamental to your framework and dilution here is akin to having a rotten foundation, leading your structure to fall, sooner or later.
Laid-down Investment Horizons & Goals
Even the best race-car driver needs a destination, a target. Similarly, map your purchase to an outcome based on your investment hypothesis, with a time-horizon in mind. Tie it to a goal, so that neither does your horizon become a moving target, nor are you tempted to exit early during adversities, impacting your goal.
Clear & Documented Process for Exits
Based on your investment hypothesis, you will know when you need to book profits, in case your target/goal is met. Similarly, however good your investment hypothesis might have been, factors change and hypotheses fail. So have a clear plan to exit in case things don’t play out the way you saw them. Having a documented process for both value-based and time-based exits, with clear rationales, is a good way to both, limit your losses and not fall in love with your darlings.
However good your stock selection maybe, expecting each to be a winner is unreasonable. Diversification is a hedge against both, failed hypotheses as well as capital loss. Build a portfolio of 15-20 stocks over time and have a cap on each stock as a % of your portfolio. 6 winners out of 10 is a good enough ratio for the portfolio.
Dear retail investor, Success in the stock market is an outcome of 3 factors – Relevant Knowledge, Robust Process and Resilient Temperament. Please use the above-mentioned levers to build a personal Investment Framework and whenever you feel swayed by emotion, go back to it and read it. You will find that not only is it helpful in the stock market, but in everyday life too. Happy investing!
Image credit: MayoFinance, Unsplash
Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families invest for their financial needs, follow their passions and achieve financial independence.
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A slightly modified version of this article was published recently on fpstudycircle.com.
We are now deep into the festival season, and normally, it would be visible, through the familiar sights and sounds associated with it. This time around though, things are different.
But one thing hasn’t changed much and that is us waiting with bated breath for Sale Season. Offline or Online, there is something about Sales that get us going. We are inherently deal-seekers, and good deals get us all pumped up.
Unfortunately, the same cannot be said of our actions when it comes to our investments in the markets. The same shopper as investor feels more comfortable entering the financial markets when markets are at highs rather than at lows. And panics to sell assets at a loss when there is a market crash, rather than buying more.
Read on to know more in our latest article, published on Moneycontrol.
In the last couple of years, there has been a lot said and done with respect to categorization of mutual funds. The regulator has attempted to put some structure in place for fund houses and managers through the categorization guidelines, in order to help investors make informed choices.
That said, it can still be quite confusing for the lay investor to understand these categories. Thankfully, there is something else that is universally understood. Cricket! And within it, IPL!
Fans know every team’s strengths and weaknesses while having his or her favourite teams to root for. So, if equity mutual fund categories were IPL 2020 teams, who would they be?
Read our latest article, published on Moneycontrol.
Building a good diversified portfolio is a journey, not a one-time action. It is not a straight-line process either, and many a times, involves taking a step or two back as well, while the overall direction is forward.
As planners, this is something we do periodically, in order to exit assets, which we feel are not well-poised for the future and move to investments which are more aligned towards the goals and expectations. While one would think that conversations for making such changes in portfolios would be easy, many a times, they are not.
Here are a few pointers for you to ponder on, so that your portfolio review exercise ends up cutting your weeds and nurturing your flowers.
Read our latest article, published on Moneycontrol, to help you build a portfolio that resembles a bunch of roses and not a bush of thorns.
The last few months have seen market volatility at never-seen-before levels. We saw the sharpest drop ever, with nearly a 30-35% drop in key indices less than a month. Yet, before one could even say “bear”, the fastest-ever recovery also followed in the next 3 months, with most indices recovering smartly from their March bottoms, to be close to their pre-COVID highs.
For customers, emotional reactions are completely understandable. On one hand, there is loss-aversion at work, and on the other, there is the fear of missing out, or FOMO.
So, coming back to the question, how does one handle such situations? Is there a way to navigate markets, especially when they go through such roller-coaster rides?
Read our latest article, published on Moneycontrol, to help you wade through this emotional jungle and take the right decisions.
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.
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.
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.
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.”
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.”
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.”
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”.
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.”
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.”
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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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)