Publication: The Times Of India Mumbai; Date: Feb 12, 2008; Section: Your Money; Page: 42If you are a conservative investor looking to earn better returns, don’t gamble on obscure stocks
I was having a discussion with Vikram Joshi—a retired corporate executive and a friend’s father—the other day. He kept repeating: “I am a conservative investor and I don’t want to loose money.” That is why I was surprised when I took a look at his asset allocation: 70 % of his investment was in equities, 10% in debt, 10% real estate and the rest in cash. What surprised me even more was that most of the equity investments were in aggressive mid cap stocks and funds—some which had doubled and tripled in a short period of time. Not only this, he was also dabbling in futures to make quick gains. I asked him: “When you are so conservative and do not like to risk your principal, why are you doing things that are not in alignment with your thoughts.” He replied: “I am making good money and this is working for me.” I told him, “You might make money in the short term when the going is good, but this strategy might burn your hands very badly and I shared my thoughts why…”
Joshi lived with his wife Sudha in Peddar Road whereas his daughters Niharika (28) and Nikita (26)—both married—lived close by. He had started investing in the markets since 2003 and his experience in the market made him believe that he had the Midas touch when it came to picking investments. However, his daughters felt he might benefit from some professional guidance. That is how we sat to discuss his
financial objectives and strategy.
Vikram was clear that he wanted to invest in instruments that will generate the highest possible returns. But he wanted his capital to be safe. “I can invest for the long-term (which I later came to know was 3-6 months),” he assured me.
I then conducted a risk assessment exercise to understand his behavior towards risk. Certainly, Vikram had the capacity to take risks. However, his portfolio was contradicting his thoughts and I knew that it would take a huge market fall to shake his belief that it was easy making money in equities and to understand the risks thathis portfolio was exposed to.
I then asked him whether he knew the risks he has taken to earn the highest possible return.
He replied in the negative. I told him that I do not understand why he was speculating with futures and those ridiculous stocks that have no earnings growth but are just going up on the basis of theories such as unlocking value, land banks, bio diesels and similar stories. I told him he was playing the riskiest game in the equity market to earn highest possible returns and one day these same investments could leave a big hole in his pocket.
Just like cigarette smokers who chose to ignore the warning that smoking is injurious to health, investors too will look the other way when it comes to the caveat that mutual funds are subject to market risk. Investors tend to focus only on returns while investing in stocks and mutual funds. One needs to understand that stock markets have their own limitations in terms of what can be expected realistically. Many a times they might run ahead of expectations or run out of steam depending on whether the majority are buyers or sellers. One of the most important things to remember is to have realistic expectations from your equity portfolio. When you have unrealistic expectations from your portfolio, you expose it to undue additional risks that you do not know of and that you cannot stomach. Mutual funds like to tout figures of 60% returns in the last three years. The dancing of stock prices and NAVs of funds might be quite tantalizing, but as an investor it does you no good.
An equally important set of questions that is never asked is: What risks has the fund taken to generate those returns as compared to other funds? One should also ask questions like: How risky is the fund? Does it have a concentrated portfolio of just a few stocks? Are investments concentrated in a few sectors? Does it have a high portfolio turnover (buys, sells and churns its stocks very often)?
Stocks and mutual funds are outstanding long-term investment vehicles and you can make good money by investing systematically and consistently over a period of time. You need to stay invested over several business cycles which could span 10, 20 or even 30 years.
Though there might be declines or even corrections in the shorter term, over several business cycles,
equities have proven to be the best asset class in terms of risk adjusted returns. I then cautioned Vikram with one of George Goodman’s quote: “If you don’t know who you are, the stock market is an expensive place to find out.”
Vikram was beginning to understand what I was getting at and seemed ready for some soul searching.
We then wrote some goals, did calculations and figured out that Vikram needed a post tax return of 8% on his portfolio to achieve those goals. However, he was keen to have at least a 10-12% return on his portfolio and was comfortable with having a 50% allocation to equity in his portfolio. The goals were: a) Post tax income of Rs 2,00,000 per month starting age 62. b) Bequeathing his estate to his daughters and to a trust running a school.
Strategy
Real estate portfolio looked healthy and he was receiving a decent size rental payout. We decided to rebalance the equity portion and shore up on the debt portion. We took stock of the worst performing mutual funds and stocks and sold them at a short term loss. Additionally, we booked short term as well as long term profits in investments that we thought had run ahead of fundamentals and allocated the amounts to fixed maturity plans (FMPs).
Contingency Planning & Daughters
We maintained a high level of cash component in a combination of floating rate funds, fixed maturity plans and fixed deposits from a contingency planning perspective, and from an opportunistic cash perspective when market falls, these can create great opportunities.
Risk Management
A thorough needs analysis revealed that Vikram had more insurance than he needed and there was no need for any additional life insurance. In fact, we advised him on discontinuing some of the endowment and unit-linked insurance policies that he had bought for his granddaughters. On one of the ULIP policies, the load was around 65% in the first year, which I felt was ridiculous. No amount of justification can be given for purchase of such policies. There was no life insurance need for him and he had sufficient medical cover. Additionally, he had cover for most of his assets.
Investment Strategy
We developed an investment plan that spelt out the following. The true purpose of this policy is to provide guidance when market conditions are either distressing or euphoric and are creating anxiety to act against your own interests. The art of making money in such markets is not to panic but to do exactly the opposite of what the people are doing. Second, invest towards your long term goals and wealth creation objectives. Keep a long-term outlook for your investments as there is a possibility that the investments could fall for a short while. Third, never panic in such markets. Don’t watch TV channels portraying the bloodbath (watching saasbahu sagas instead for a change could be a good option). Just stay put.
We increased the debt exposure through PPF, fixed maturity plans, senior citizens scheme and monthly income plans. We also created a long term core portfolio of two real estate properties, PPF, fixed maturity plans, fixed deposits, senior citizens scheme, five diversified equity funds, two balanced funds, 10 stocks, gold and real estate PMS. We looked at cross holdings between mutual funds and stocks and created a portfolio well diversified across sectors, stocks, fund managers, investing styles and investment objectives. Next, we parked short term and contingency funds in floating rate funds, fixed maturity plans and fixed deposits.
We have also decided to rebalance the portfolio every six months and developed a systematic rebalancing strategy to readjust the asset allocation within fairly flexible bands.
Estate Planning
We created a will detailing all investments, bank accounts, and schedules of properties. We have also discussed strategies on how his capital should be deployed so that a steady stream of income can be provided to the trust to operate the school. He did not seem to fully appreciate my thoughts then but nevertheless acted upon it. I bet he is sleeping peacefully when many of us are feeling the carnage of the equity market.
MEET THE FAMILY
Vikram Joshi lives with his wife Sudha in Peddar Road whereas his daughters Niharika (28) and Nikita (26)—both married—lived close by. He had started investing in the markets since 2003 and his experience in the market made him believe that he had the Midas touch when it came to picking investments. Amar Pandit is a certified financial planner
Joshi lived with his wife Sudha in Peddar Road whereas his daughters Niharika (28) and Nikita (26)—both married—lived close by. He had started investing in the markets since 2003 and his experience in the market made him believe that he had the Midas touch when it came to picking investments. However, his daughters felt he might benefit from some professional guidance. That is how we sat to discuss his
financial objectives and strategy.
Vikram was clear that he wanted to invest in instruments that will generate the highest possible returns. But he wanted his capital to be safe. “I can invest for the long-term (which I later came to know was 3-6 months),” he assured me.
I then conducted a risk assessment exercise to understand his behavior towards risk. Certainly, Vikram had the capacity to take risks. However, his portfolio was contradicting his thoughts and I knew that it would take a huge market fall to shake his belief that it was easy making money in equities and to understand the risks thathis portfolio was exposed to.
I then asked him whether he knew the risks he has taken to earn the highest possible return.
He replied in the negative. I told him that I do not understand why he was speculating with futures and those ridiculous stocks that have no earnings growth but are just going up on the basis of theories such as unlocking value, land banks, bio diesels and similar stories. I told him he was playing the riskiest game in the equity market to earn highest possible returns and one day these same investments could leave a big hole in his pocket.
Just like cigarette smokers who chose to ignore the warning that smoking is injurious to health, investors too will look the other way when it comes to the caveat that mutual funds are subject to market risk. Investors tend to focus only on returns while investing in stocks and mutual funds. One needs to understand that stock markets have their own limitations in terms of what can be expected realistically. Many a times they might run ahead of expectations or run out of steam depending on whether the majority are buyers or sellers. One of the most important things to remember is to have realistic expectations from your equity portfolio. When you have unrealistic expectations from your portfolio, you expose it to undue additional risks that you do not know of and that you cannot stomach. Mutual funds like to tout figures of 60% returns in the last three years. The dancing of stock prices and NAVs of funds might be quite tantalizing, but as an investor it does you no good.
An equally important set of questions that is never asked is: What risks has the fund taken to generate those returns as compared to other funds? One should also ask questions like: How risky is the fund? Does it have a concentrated portfolio of just a few stocks? Are investments concentrated in a few sectors? Does it have a high portfolio turnover (buys, sells and churns its stocks very often)?
Stocks and mutual funds are outstanding long-term investment vehicles and you can make good money by investing systematically and consistently over a period of time. You need to stay invested over several business cycles which could span 10, 20 or even 30 years.
Though there might be declines or even corrections in the shorter term, over several business cycles,
equities have proven to be the best asset class in terms of risk adjusted returns. I then cautioned Vikram with one of George Goodman’s quote: “If you don’t know who you are, the stock market is an expensive place to find out.”
Vikram was beginning to understand what I was getting at and seemed ready for some soul searching.
We then wrote some goals, did calculations and figured out that Vikram needed a post tax return of 8% on his portfolio to achieve those goals. However, he was keen to have at least a 10-12% return on his portfolio and was comfortable with having a 50% allocation to equity in his portfolio. The goals were: a) Post tax income of Rs 2,00,000 per month starting age 62. b) Bequeathing his estate to his daughters and to a trust running a school.
Strategy
Real estate portfolio looked healthy and he was receiving a decent size rental payout. We decided to rebalance the equity portion and shore up on the debt portion. We took stock of the worst performing mutual funds and stocks and sold them at a short term loss. Additionally, we booked short term as well as long term profits in investments that we thought had run ahead of fundamentals and allocated the amounts to fixed maturity plans (FMPs).
Contingency Planning & Daughters
We maintained a high level of cash component in a combination of floating rate funds, fixed maturity plans and fixed deposits from a contingency planning perspective, and from an opportunistic cash perspective when market falls, these can create great opportunities.
Risk Management
A thorough needs analysis revealed that Vikram had more insurance than he needed and there was no need for any additional life insurance. In fact, we advised him on discontinuing some of the endowment and unit-linked insurance policies that he had bought for his granddaughters. On one of the ULIP policies, the load was around 65% in the first year, which I felt was ridiculous. No amount of justification can be given for purchase of such policies. There was no life insurance need for him and he had sufficient medical cover. Additionally, he had cover for most of his assets.
Investment Strategy
We developed an investment plan that spelt out the following. The true purpose of this policy is to provide guidance when market conditions are either distressing or euphoric and are creating anxiety to act against your own interests. The art of making money in such markets is not to panic but to do exactly the opposite of what the people are doing. Second, invest towards your long term goals and wealth creation objectives. Keep a long-term outlook for your investments as there is a possibility that the investments could fall for a short while. Third, never panic in such markets. Don’t watch TV channels portraying the bloodbath (watching saasbahu sagas instead for a change could be a good option). Just stay put.
We increased the debt exposure through PPF, fixed maturity plans, senior citizens scheme and monthly income plans. We also created a long term core portfolio of two real estate properties, PPF, fixed maturity plans, fixed deposits, senior citizens scheme, five diversified equity funds, two balanced funds, 10 stocks, gold and real estate PMS. We looked at cross holdings between mutual funds and stocks and created a portfolio well diversified across sectors, stocks, fund managers, investing styles and investment objectives. Next, we parked short term and contingency funds in floating rate funds, fixed maturity plans and fixed deposits.
We have also decided to rebalance the portfolio every six months and developed a systematic rebalancing strategy to readjust the asset allocation within fairly flexible bands.
Estate Planning
We created a will detailing all investments, bank accounts, and schedules of properties. We have also discussed strategies on how his capital should be deployed so that a steady stream of income can be provided to the trust to operate the school. He did not seem to fully appreciate my thoughts then but nevertheless acted upon it. I bet he is sleeping peacefully when many of us are feeling the carnage of the equity market.
MEET THE FAMILY
Vikram Joshi lives with his wife Sudha in Peddar Road whereas his daughters Niharika (28) and Nikita (26)—both married—lived close by. He had started investing in the markets since 2003 and his experience in the market made him believe that he had the Midas touch when it came to picking investments. Amar Pandit is a certified financial planner
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