Goal-based investing

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

Girish Ganaraj Equity Investing, Financial Freedom, Personal Finance , , , 0 Comment
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.

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

 

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But I am scared of Equity!

Girish Ganaraj Financial Planning, Personal Finance , , , 0 Comment
But I am scared of Equity!


During most client financial planning conversations, the financial planning process generates a sort of awakening. For some, its like “blinkers off”, while for some others, it’s like “a huge load off my shoulders”. For some, it’s a scientific validation of their understanding of their finances, while for others, some aspects come as a rude shock. But usually for everybody, the discussions lead to a clear shared understanding of their current financial position, a discovery of what their financial future priorities are and what they need to do going forward to achieve them.


As a part of our conversations, we also transparently share the short-term volatilities that asset classes like equities have, which could lead to a capital loss of even 20-30%, even if temporary. Over the course of our discussions, most customers end up building comfort with various available asset classes, as well as the differences between them. With our help, they also get to know what (and how) they will need to invest in each asset class to achieve which goal, and get comfortable with the risk-return trade-offs of each asset class.

Rarely though, we come across some customers who are quite resistant to the idea of investing a part of their savings into equity, irrespective of how critical it is to achieve their financial goals. When we try to understand more, the following deeper truths emerge

  • I do not want to take any risk, I am very conservative
  • I just don’t understand Equity
  • I have no idea of how the stock market works
  • I am worried that I will lose all my money
  • I prefer to invest in something I understand – like Real Estate or Gold


To many of you, these reasons may sound familiar. So, how can these worries be addressed?


For us, these worries are opportunities for us to understand customers better so that we are able to adapt their investments to their risk appetites in the best possible way, while enabling them to meet their goals. At the same time, it is also an opportunity for customers to understand a bit more about various asset classes, especially the ones they do not know much about, confront their beliefs and overcome their fears.


Irrespective of your mental approach towards decisions, the below rationales should help you to understand and update your beliefs about the risks attached with equity.

  • History shows that while in the short-term, investments in equities are very volatile, in the long-term, a well-selected and adequately-diversified portfolio of equity mutual funds is very safe from a capital loss perspective. The below table illustrates this
  • A significant part of our own portfolio is in equities and we are usually invested in most recommendations to our customers. Our own experiences in investing in equities has been very positive. This also helps build confidence in our customers that we have skin in the game and that our interests are aligned.
  • Many customers who come to us have a significant % of their Net Worth in Real Estate, which hasn’t had a great run in the last decade or so. That being the case, the risk of remaining further invested in Real Estate is higher, and investing in equities not only helps them meet their goals more safely, it also reduces risk in their portfolio through diversification.


As a people, we are used to taking risks in many aspects of our life. We take those risks by managing them better, by constantly building and updating our understanding of the risks and taking appropriate corrective actions, when needed. Our approach to risks in investing needs to be similar.


Equities are an important asset class, arguably the most important from a wealth creation perspective, and much needed for all of us to meet our long-term financial goals. Avoiding Equities due to your fears of them is something that can severely impact your financial security in the future. The better thing to do would be to understand your reasons for fearing equities and seek the correct information in order to overcome them.


Finwise is a personal finance solutions firm that helps individuals and families plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

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Managing our fears while investing our money

Girish Ganaraj Financial Planning, Personal Finance , , , 0 Comment
Managing our fears while investing our money


“Planning is bringing the future into the present so that you can do something about it now.” – Alan Lakein


While we have always lived in uncertain times (is there any other kind?), none of us actually welcome uncertainty, especially in our personal lives. As human beings, we avoid uncertainty – just evidence the popularity of daily horoscopes or the rush for numerologists and astrologers.


While we are fearful of uncertainty, we are generally good at managing it. One of the ways one can manage uncertainty is by preparing for it. One way to prepare well for uncertainty is to plan for the probable outcomes.


In many facets of our life, we manage uncertainty very well. A person catching a regular train to work keeps a buffer of a couple of minutes to reach the station to account for a sudden traffic jam. He will also have an alternate plan to reach work in time, just in case the train is missed (eg. take a cab). While this may seem a very basic example, this principle is employed everywhere by us.


Also, when we plan for uncertainty, we plan suitably keeping in mind the “risk”. We make sure that we don’t take more than an acceptable amount of risk for a given event, depending on the severity of the uncertainty and the opportunity cost of failure. We use a “margin of safety” to manage uncertainty and the higher the uncertainty or the higher the stakes (probable losses), higher is the margin of safety. The whole objective is to try and make sure that the plan doesn’t fail, except in extremely unforeseen circumstances.


Eg. in the above case, in order to catch a local train, one would be comfortable reaching the station about a few minutes before the departure time. But in case of an airplane journey, one generally reaches the airport nearly 1.5-2 hours before the journey. This is despite knowing that the check-in counter closes only 45 minutes prior to departure. In this case, we keep a higher buffer because the “cost” of a missed flight here is much higher than the cost of the missed local train.



So how is this relevant to Investing? When we invest our hard-earned money, we wish to reduce uncertainty. Hence, we seek surety in returns. We also fear the risk of capital loss, even if it temporary. So, how does one handle these fears? Let us attempt to answer this in light of what we learnt from the above quoted examples.


One lesson is to choose the appropriate asset class depending on the time-horizon of the investment. When you do that well, time is the “buffer” that ensures that “risk” (eg. market volatility) gets evened out and generates the necessary return over the long term. Going back to our example – when we have enough time on our hand to reach the airport in time, does an unforeseen traffic jam (or a punctured tire) worry us? The answer is no, because we know that this is temporary, and we have enough time to reach our destination comfortably.


Another lesson is to have a “margin of safety”. As a retail investor, not following the herd to jump in when markets are booming would ensure that “margin of safety” is not compromised. Making sure that your asset selection is in the right products and in the hands of accomplished managers also helps manage this risk fairly successfully. After all, trying to catch a flight with 30 minutes left (before counter closes) versus 5 minutes, would make your journey so much more worry-free in terms of experience, even with the unplanned traffic jams and punctured tires, wouldn’t it?


Having fears while investing your money is natural. They cannot be wished away. But they can be managed and overcome by implementing these lessons. Having a plan for your financial goals, which identifies the right asset classes and investments to meet them, can make your investing journey a far more peaceful one, despite volatilities that will be faced along the way. And having a good financial planner to hold your hand through the planning journey, while keeping in mind your needs and risk appetites, will make sure that you will enjoy your present, secure in the knowledge that your future is also in safe hands.


Finwise is a personal finance solutions firm that helps individuals and families plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.


Image credit: Gino Crescoli, Pixabay.com