How your savings can dictate whether you sulk or brim with confidence

How your savings can dictate whether you sulk or brim with confidence


A person with high savings will always be confident about his/her work and will never become a victim of office politics



By Gajendra Kothari

(The writer is Managing Director and CEO of Etica Wealth Management)

The following excerpt is a quote from a First Federal Savings newspaper advertisement in the St. Petersburg Times from the early 1960s. This is one of the finest print advertisements I have seen in a long time on money. It has a powerful social message.

‘Your savings, believe it or not, affect the way you stand, the way you walk, the tone of your voice. In short, your physical well-being and confidence.’

One of my advisor colleagues shared it a few days back, and I was utterly overwhelmed with the deep meaning of the message. The timing couldn’t be better.

So here I am. But first, let’s read the whole advertisement at least three times.







I am sure you must be mesmerised too.

Savings and body language

As an advisor who has met thousands of individual investors over the last 16 years, it is easy to spot a person who is very confident, backed by his/her high savings. And vice-versa too. People with meagre savings, coupled with a loan burden, are the most vulnerable as COVID-19 has proved. A few of our investors who had very high savings and have lost jobs are the least worried because they know they have a good corpus to back them up. They are now spending quality time with family which could not have been earlier possible and are also learning stuff to keep them relevant and occupied. And there are an unfortunate few who lost their jobs and have very slim savings in these tough times, resulting in their stress levels going up 10 times. 

I remember when I first started my serious savings in the form of a Rs 10,000 SIP in August 2010, I didn’t realise the power of savings. But today, whatever little wealth I have created is all because of a disciplined regime of increasing my savings year after year. I continue to bump up my savings every year come what may. At present, my family’s SIP is Rs 8.70 lakh per month, and hopefully, by March 2021, it should cross the Rs 10 lakh SIP mark. And, I will not stop until I chase my dream of touching the coveted Rs 100 crore mark by age 50 and become One Idiot. And that reminds me, whenever I talk about the One Idiot goal, the first question people ask me is where I am investing my money and what is the expected return and very few people ask how much I am saving in the first place. Always remember how much you save and how long you save for is in your control; returns are not. So we should control what is controllable and leave the returns to markets.

When I look at many of my MBA friends (I did my MBA in 2004), they must easily be earning in the range of Rs 30 lakh to Rs 1 crore p.a., but sadly the savings have not kept pace with their earnings while the expenses surely have. This can be attributed to the below phenomenon. They have all been victims of the normal approach of savings while the short movie One Idiot made sure I take the smart approach. This doesn’t mean I don’t spend. I do enjoy all the pleasures of life after making sure that my saving for the month has happened. By doing this, I don’t feel guilty at all, mainly when I am on a shopping spree on Amazon.

Planned saving

This pandemic has highlighted the importance of planned savings even more. Most investors do not have an emergency fund (6-12 months of monthly expenses). People want to plan for their children’s education or a house purchase, but will not think about maintaining a contingency fund. In fact, this should be the first goal of any saver/investor. A sound emergency fund will help them precisely in these difficult times, so they don’t have to pull out from long-term investments, especially when markets are volatile.

I have personally seen many people who have taken a housing loan being comfortable working in the same company even if they are not enjoying it (mostly due to a terrible boss), simply because they have an EMI burden on their.

As mentioned in the print advertisement, a person with high savings will always be confident about his/her work and will never become a victim of office politics and indeed not a “Yes” man to his/her boss.

The importance of savings also takes centre-stage today because we have a finite period to earn money and this pandemic has proved that business models can change overnight and there is nothing called job guarantee. One of our doctor clients had to work overtime in a reputed hospital with a 20 per cent salary cut (never heard doctors taking pay cuts and that too in a pandemic when they are required the most!). As a result, the person had to curtail/stop SIPs, and we know that once there is a break in something, it’s challenging to build the momentum again.

May be, this advertisement can push us into building our savings all over again if we have not done so already. 

Happy Investing

Source: Moneycontrol.com

3 Investment habits of the elderly to follow and the ones to discard

Investment habits of the elderly to follow and the ones to discard

The elderly have a system of recording expenses and reconciling with their bank statements every month.


Have you ever had conflicting emotions regarding the same issue? It seems to happen quite often to me when I look at the ways in which senior citizens handle their money. At times, I wish I could be as organised and involved with my own finances. At other times I roll my eyes and make myself a promise never to end up like them when I grow older. I guess it’s only natural that there are some things that you envy and some which you absolutely detest and don’t want to emulate ever.

This my attempt to list three traits I would love to work on with the older generation as an inspiration and three aspects I would want to do differently.

Traits to take from the elderly

Being completely involved and conscious with money: Generally, during our conversations with customers, we check on the current expenses and many clients have absolutely no idea how much they spend. The initial figure given by them is close to half of what they actually spend, when they sit down to reconciling their expenses. It invariably comes as huge shock that they have been spending far more than they had assumed.

But, in the case of senior citizens, we notice that they always have a handle on their expenses, and they are usually pretty accurate. Many of them have a system of recording expenses and reconciling their bank accounts every month. With years of practice, it has become a truly ingrained habit. During the lockdown, many children would have had a tough time convincing their parents that the customary visit to the bank was not really important and an emergency worth risking exposure to.

Somehow the younger lot seem to find tracking expenses tedious, even painful. While being obsessed with accounting for every rupee may not work for us, having a broad idea and hence a budget can work very positively when handling your finances.

Delayed gratification: For most of us, waiting and giving a thought to something which has our fancy is not normal. It doesn’t help that you can buy most things at a click of a button. We buy in a hurry, get momentary joy and sometimes regret in leisure. This is not the case with older people: they mull over their decision for a while, and when they do decide to go ahead, they derive a lot of joy from their purchases. This ability to think ensures that most of their money is spent on things that really are needed or experiences which bring them joy.

The idea here is not be frugal and deprive yourself; it is to be sure that whatever you spend for is useful or brings some joy into your life.

Relationships have depth: The other aspect, which is such a boon and I would surely like to work on, is relationships. The amount of effort they put into a relationship is truly amazing, and despite not having the technological tools to keep in touch, they are strongly connected to the extended family and friends. They are more involved in the lives of most people they meet; it is not unusual that your mother will know details of the bank manager’s children or the ailments of the security guard’s wife. In contrast, the younger the person the more superficial and transactional the relationship.

Where we need to tread a different path

Depriving self to ensure your children’s welfare: Look around you. I am sure you will find ample examples of this. We come across senior citizens who are parents of very well-to-do children. They have accumulated sizeable wealth during their lifetime by being both prudent and smart. Many of them do not want to touch their capital; they only want to use up the capital appreciation or interest portion. If this means depriving themselves of even simple things which bring them great joy, they do that without any hesitation.

When we explain that the children are well to do and may not find great value in the estate left behind and would probably be happier seeing their parents enjoying their wealth, it usually falls on deaf ears. This is something I would like to avoid.

Seeking safety at all cost: Safety and guarantee are words that most senior citizens love. Of course, there are exceptions to this and I have interacted closely with them too. But, by and large, short-term volatility is viewed negatively, and they would rather settle for tax-inefficient, low-yielding instruments. No amount of discussion of how inflation will erode purchasing power works on them. Each one’s situation is different, and such an investment may be suitable in some cases. In others who are investing to build an estate for example, it would make sense to have a diversified portfolio.

Unwilling to adapt to change: Many of them find it difficult to adapt to the changing times. If something has worked for them in the past, they stick to the same formula and are supremely confident that things will turn around. For example, real estate and gold are some investments that worked for them in the past. They are unlikely to move away from this thought even if the house is visibly depreciating in value; they hold on, in the hope of a miracle.

It is true that you may see these behaviours in much younger people too. However, this is based on my various experiences with both younger as well as senior citizen customers. I have met quite a few seniors who have all the positive traits mentioned above and none of the negative ones. They are an absolute delight to interact with. But I am yet to figure out how they have bucked the trend and managed to keep up with the times. I can only hope and pray to be amongst this small minority as age catches up.

Happy Investing

Source: Moneycontrol.com

The intelligent investor is a realist who sells to optimists and buys from pessimists

The intelligent investor is a realist who sells to optimists and buys from pessimists

 

Asset Allocation helps us to generate optimal risk-adjusted returns

 

By Gajendra Kothari

(The writer is Managing Director and CEO of Etica Wealth Management)

 

Let me begin my column with a valuable lesson in investing that I have learnt during the ensuing COVID-19 crisis. I have always been a buy-and-hold long-term investor for the last 10 years. No amount of volatility in the markets could shake my belief in the various equity mutual fund investments that I have made over the years. And I was preaching the same to other investors as well. The idea was very simple: create sustainable wealth by increasing SIPs over a long term of 20-30 years in simple diversified equity funds.

A viral problem

Everything was fine till the COVID-19 pandemic struck, and equity markets world-over came tumbling down. In March 2020, the markets were so volatile and most our team's time went in pacifying our investors' concerns. We had always done the right strategic asset allocation for our investors, considering their risk profile, time horizon and the goal for which they were making the specific investments. For example, an equity investment would only be advised for a minimum period of 5-7 years (preferably 10-plus years). Still, we realised that many investors who came in during the last few years couldn't digest the volatility even though their time frame was much longer.

 

We realised most investors would mean something else when they make a statement "I want to invest for 20 years in equity, and I am happy with 12 per cent average returns." What they meant was that they wanted almost 12 per cent returns every year, and in no year the portfolio value should be negative. I am not blaming them at all. That's classic behavioural finance at work.

Getting over the initial phase

Higher volatility makes an investor very nervous, more so in the early part of her investing days. The most difficult phase in investing is the first five years where 90 per cent investors would abandon their long-term financial plan at the first signs of major volatility. A right asset allocation framework could help investors make the journey much smoother, thereby ensuring she stays on track with her long term plan.

 

Lots of studies like the one mentioned above have been carried out time and again to prove that practising asset allocation would determine the bulk of the portfolio returns. Security/scheme selection or market timing has practically very little relevance. However, most of us (investors and advisors included) fall into the trap of security selection and market timing time and again.

Another lesson I learnt first-hand is asset classes returns (including sub-asset classes) always revert to mean levels over a period of time. I was doing my SIP in a small cap fund for 8 years and as at Jan'18 end the CAGR was 35 per cent per annum on the back of stellar small-cap rally of 2017. I didn't book profits because I believed in the classic buy-and-hold principle. And today, the 10-year CAGR has dropped to 14 per cent. Not bad, but it could have been much better had I practised asset allocation more prudently, i.e. the market is a pendulum that forever swings between unsustainable optimism (which makes asset classes too expensive) and unjustified pessimism (which makes them too cheap). The Intelligent Investor is a realist who sells to optimists and buys from pessimists. And if it can be practised across asset classes then over a long term, an intelligent investor can generate very healthy returns with much lower volatility.

Using the lessons

This time I could apply the lesson in another investment of mine in a China-focused mutual fund. My five-year SIP was showing a paltry return of 2.5 per cent at the start of 2019 and within a year, the six-year SIP returns had zoomed to almost 18 per cent annually. It means, the NAV of the China-focused mutual fund had risen by almost 40 per cent in a year's time. I took some profits off the table, while my SIP still continues. (It's another matter that I am proven wrong again since Chinese markets have gone up almost 30 per cent in the last 6 months). However, I am not regretting my decision as I made decent gains.

We have to remember that we can never get out at the top or invest at bottom levels. Asset Allocation doesn't strive to give the best returns. It just helps us to deliver optimal risk-adjusted returns. And if we can manage risk well, returns will be taken care of automatically.

 

As the legendary Warren Buffet says : Rule no 1: Don't lose money. Rule No 2: Don't Forget Rule No 1.

 

Happy Investing

Source: Moneycontrol.com