2020: One big learning and some actionables

 

Life is one roller coaster of a ride and the experience of highs and lows are what add wealth to our lives. 2020 has been a remarkable year. An event which none could imagine, actually affected the whole world and yet it has been a fabulous year of learning and adapting.

 My learning in one line which elaborated below.

 Always be prepared for the worst, while being optimistic about the future.

Simple line, but when I pondered on this, it has a lot of implications and actionables.

We will look at the first part of this – Always be prepared for the worst.

Those most affected by the covid virus were small businesses and their employees who lost jobs or faced salary cuts. The General Manager of a large establishment with a huge salary, found himself agreeing to get basic minimum pay as per Govt. norms for the last few months and he was lucky. Many businessmen faced huge losses and many salaried employees were out of a job. So, what are my learnings and actionables?

1. Always, always keep personal debt to the minimum – if at all you need to take on debt:

Debt is a killer of finances and those stuck in EMIs due to buying expensive cars, phones and even that extra flat they did not need have suffered the most. If you cannot pay off that credit card fully every month, you should stick to using debit cards only. Freedom is being debt-free. A corollary of this is - I observed this year that much of fancy stuff we accumulate, we do not need.

2. Keep an emergency fund AND use it for emergencies only. This is is self evident now. A black swan event like the covid pandemic has only underscored the need to have an emergency fund and to use it for emergencies only – not for personal consumption. Not to be touched when you see a huge discount sale, neither for stock market trading. 

3. Have proper life and medical insurance to safe guard your family

4. In Investing: STICK TO ASSET ALLOCATION. It works!!! My favourite mantra!

I have always emphasised on asset allocation and believe me it was the most difficult to stick to this in 2017 when the market was simply rocketing up. The below 2 charts will show you what I mean.

This first chart depicts a 3 year lump sum return from 23.3.17 to 23.3.20 when the Nifty fell to a low. A portfolio consisting 60% of a multicap fund and 40% of a short term bond fund with yearly rebalancing did better than the Nifty 500 TRI. In fact was positive when the index was negative 

THREE YEAR RETURNS TILL 23.3.20. ASSET ALLOCATION PAYS
Balanced portfolio was positive even at the market lows!!

Chart 2 - same investment continued till 23.12.20 when the market is at a high.

BALANCED, ALLOCATED PORTFOLIO: LESS VOLATILE AND GOOD OUTCOME

This second chart is very interesting. The same 60:40 portfolio was kept up till 23.12.20. Inspite of the market touching new highs, the equity:debt portfolio has matched up so far. This may change if the market shoots up but this chart shows how the journey has been smoother. It takes discipline and strength to keep to an asset allocation framework in extreme markets.

5. My final point under being prepared for the worst is to focus on your career and develop skills so that you do not suffer professionally in case of such events like covid. Keep learning. Keep equiping yourself. Your skill sets will help you. I cannot emphasize this enough. Seeing too many who are working from home, get distracted and say - "hey lets learn to make a living off trading stocks and options". Ill advised and remember, the source of your income is not investments in the beginning. It is your profession.

Being ready for the worst would mean that you are never shocked by any event and can bounce back quickly.

Now to the second part of the learning – Be optimistic, be positive.

 Human ingenuity has overcome terrible problems in the past and hey, there is no reason we will not overcome tough situations in the future. Being optimistic helps when you are investing in market related instruments. The market is certainly no place for pessimists, negative folk. A positive mind set made many investors see opportunities and I personally know many who kept investing from April and have made tremendous gains.  Many others continued their SIPs which work best in volatility. Below are two charts of  SIPs. One 5 years SIP ending on 23.3.20 in the NIFTY 500 TRI gave a NEGATIVE -8.7%. The same SIP if continued till December gave a POSITIVE 12.4% annualised!!! Unbelieavable no?. This is the CAGR!! Just 9 months made a HUGE difference. Look at the 2 charts below.

 

IF YOU STOPPED A 5 YEAR SIP IN MARCH- YOU ENDED UP NEGATIVE - 8.7%

If you had continued the SIP till December, the -8.7% annualised return has become +12.4%

THE SAME SIP CONTINUED HAS GIVEN ANNUALISED 12.4%. THE VERY SAME SIP!!!

Some corollaries from BE OPTIMISTIC: 

Do not panic when things are bad. Those who panicked and redeemed in the months after covid struck have lost big!!! Do not stop SIPs and withdraw. Stay the course when you have a plan.

Do not procrastinate. I deal with many investors and a few have been dilly-dallying and procrastinating. A delay can cost big. Guys who spoke to me from June on are still deciding in December!!! The markets have seen a dizzying rise. And those who allocated when the markets were down, certainly have a good start which gives a lot of confidence in one's investment journey.

In brief 

1. Debt is a killer. Live within your means

2. Keep an emegency fund and be prepared for the worst.

3. Have adequate medical and life insurance to protect loved ones.

4. Stick to asset allocation!! Have a process! 

5. Focus on your career and business and build skillsets. That alone will provide you the money required to grow wealth. DO NOT get distracted by your neighbour trading in options.

Being ready for the worst would mean that you are never stunned into inaction or impusive actions when events like covid happen. Being ready means you adapt with clarity of thought.

6. Be positive. A positive and optimistic attitude alone will let you see opportunities even when the going is tough.

Wishing you all a Happy New Year, filled with health and peace of mind....And Happy Investing

I am a mutual fund distributor and you can follow me on twitter here. 

Mutual Fund investments are subject to market risks. Read all scheme related documents carefully before investing.

#Throwback2017 General observations. Bulls, SIPs and gyani investment babas

2017 - year of the Bull

Wishing you all a very happy new year, filled with good health, success in your endeavours and a step forward to complete financial freedom.

2017 has been fantastic for equity investments and do see the chart prepared by Rajesh below.

Just wish to make a few observations:

All those who have remained in the markets since 2008 have truly gained. They have seen lows and have understood the necessity of asset allocation. They remain grounded and have taken advantage of this bull run. While, this year has been good and in fact the last 3 years have been great, investors will do well to remember years when things did not go well.

Thousands of new investors have entered the equity through mutual funds – mainly using SIP as an instrument. The industry monthly SIP book is almost 6000 crores now. SIP has been a wonderful way to enter for those who earn a salary and for those whose cash flow allows a specific sum to be invested every month. 

Source: AMFI

The one thing I can say is that simplicity scores over any complicated investment method. Salaried professionals simply have no time to look regularly at their portfolio and keep a tactical portfolio running.

There has been no dearth of social media gyani investment babas waiting for the market to crash. Some of them seem to be waiting to tell the new entrants into Mutual Funds that mutual funds sahi nahi hai!! Waiting to tell the SIPers that that SIPing does not take out risk from equity. Today also one worthy on twitter said that he was waiting for years of single digit returns so that his point was proved right! Phew!

No investor says that SIPing takes out risk from equity investing. And we know that the market will crash sometime. We SIP not because it is a risk free method of investing, but because our cash flow allows for monthly investments. It is a tool to maintain discipline and automate the saving/investment process. Using SIP does not mean not allocating to debt! IMHO the best advice is one that makes you STAY THE COURSE and stick to your investing principles. Stay the course, shut out the noise and you will do well on your path to complete financial freedom.

Equally, many gyani investment babas like only 1 or 2 particular fund houses because of their “perceived honesty” and criticize others. They have have missed out! Be open to ideas. Always be open to new ideas. Approaching investments with a closed mind is having a frog in the well approach There are some great fund houses with some great schemes and fund managers. You miss out if you do not use these to your benefit. The light blue line in the chart below is the fund with a low TER and the orange line is a NIFTY ETF. These are one year returns. These are all large cap based funds that I track. So, be open and do not miss out on good opportunities. Yes, times may change and one day we may move into an era of passive investing. Till that time comes, make the best out of active funds. Be open to changing over to passive investing too :)😁

One important point: Many will not agree with me, but I would certainly NOT neglect mid cap based funds just because they have run up a lot. More on this in a future post.
If you've remained in SIP in a mid cap fund for the last 5 years, you've surely got an XIRR of > 25% in that fund. However, keep expectations grounded.

A note on debt: Just because the last one year has not been good for debt funds, do not neglect these. The GOI 10 year bond is at 7.33% now and FD rates are at about 6.75% only for a one year FD. Rates look to be inching higher and definitely bond funds look attractive. Some of the shorter duration and accrual funds we track have all given a CAGR of > 8.5% over 3 years.

Finally a few words for 2018

• Imbibe principles of personal finance and investing well
• Be disciplined when it comes to working for complete financial freedom and automate the process
• Stay the course
• Do not procrastinate ( in cleaning up portfolio, in rebalancing to original allocation etc) 
• Cut out the noise from financial media – learn to filter out the information you need
• Last – take help if you need it.

Once again, wishing you all a happy, healthy and successful 2018

Mutual Funds are subject to market risk. Read all scheme related documents carefully before investing