Markets are on a see-saw. For a few days they surge and then they slip back. I guess this is going to be the story through 2019. Let’s look ahead.

·      Election results – Look, there is always a knee-jerk reaction to election results. Always remember that you invest in equity because you want to make money in the long term and not for short term profits. In the long run, it really does not matter. The market’s reaction to 2019’s election result will be a tiny blip 10-15-20 years from now. Let’s look at some facts about where the markets were in:

Year	Sensex
1980	148
1990	1048
1992 Aug	2529	Harshad Mehta crash
2000	3972
2008-Oct	8509	US Housing bubble crash
2010	20509
2019 (15-Feb)	35809

If out of fear and a feeling of despair you had not invested or disinvested in 1992 or 1996 or 2000 or even as recent as 2008, you would have lost out. Markets go through their cycles and have their ups and downs. As an investor, you have to learn to ‘ride’ these patterns. Investing is not only a ‘Gloom and Doom’ Report, there is also a ‘Bloom’.

Think of the year 2025, 2030, 2040 and beyond. Will this election result matter or will growth matter? No matter who has been in power, economies have only progressed. From the Great Depression of 1929 to electric cars, from the Bengal Famine of 1943 to having a surplus of foodgrains, our lives have only improved, and markets have always reflected this.

So, don’t fret over who will win and which Govt. will come to power, focus on charting out your LifeGoals and investing wisely to achieve them.

·      Recession in the US and Europe? – According to Krugman, the US is in worse shape than it was in 2008. What he is referring to is the country’s huge public debt which, at a little over $22 trillion, has been growing over the last few years, and a debt-to-GDP-ratio – a measure of the ability of a country to repay debt – rising to 104% now. He is now looking at a recession also because of the slowdown in Europe, where economic powerhouse Germany has been hit because of tariff wars involving the US and China, a recession in Italy, and slowdown growth in France. ¹

·      Debt markets on tenterhooks – The IL&FS story broke in late-2018 and debt markets have been in a roil since. Just about when it was sinking in, in came the story about DHFL promoters siphoning off money. Then, two more shots – Zee and Reliance (Anil Ambani group) were in the news for all the wrong reasons and their share prices plummeted. A few clients called and enquired about the way ahead – should we sell our MFs / should we move from debt MFs to FDs? For once, even I was taken aback with the speed of events and it got me thinking.

Why do we invest? To make our money grow so that we can meet our LifeGoals, right? And to achieve this, we invest across various asset classes – primarily equity and debt and for some it could even have been in Gold and real estate. Each of these, carry a degree of risk and all these asset classes exist in a volatile market-space. The degree of volatility is dependant on a number of factors – internal and external – most of which we (as investors) have no control over. All that we can do is to try and minimize the risk so that we can meet our LifeGoals as and when they become due. The level of volatility is not within our control. It is very difficult, is not impossible, to predict black swan events. So, my suggestion to you is that you have to ‘Keep Calm and Carry On’. Do not let the near-term ‘noise’ distract you. Focus on achieving the numbers that you have set out to get, as listed out in your LifeGoals. If you are investing without setting out your LifeGoals, correct that anomaly.

Once you get your Focus right, the ‘Noise’ will disappear.

Have a good day.

A New Year. An Uncertain Beginning.

2017 is going to be an exciting and uncertain year. There are so many unknowns that one can’t predict the year.

• ·       Demonetization – The entire exercise of pulling out Rs. 500 and Rs. 1,000 notes is over and the reason for the same seems to be unclear. Almost the entire amount of currency (Rs. 15.44 lakh crore) has been deposited in the banks and has come back to the RBI. This is not a good sign as it clearly shows that there is no fear of the law. Per reports, the RBI has put back around Rs. 8-9 lakh crore back into the system. I think this is all that will come back. According to me, the original amount of Rs. 15-lakh crore will not come back to the system. Because if it did, then no one will move to ‘digital’ as we are a ‘cash-happy’ country, given the fact that 98% of our transactions are in cash. The after effects of demonetization are still to play themselves out and no one knows for sure where they would lead to or how long it would be before things get back to normal. I think the current levels of cash are the new normal and slowly we will have to adjust to this. We will have to arrive at our own balance of cash vs. digital. I had hoped that the Govt. would have announced follow up measures to the demonetization on gold and property, but nothing has been announced so far. Hopefully, in the months to come. As many experts have as many opinions. Most are guesstimates as this is a ‘black-swan’ event which has no prior.

• ·       Trumped up – With Donald Trump in the driver’s seat now, there is a lot of uncertainty in the global markets. His ‘protectionist’ approach could change the dynamics of business across the world. No one knows what his policies would be and hence the uncertainty. From NATO to the TPP and NAFTA, the future of everything is unclear.

• ·       Fed rate hike – The US Fed is expected to raise their interest rates 2-3 times this year. This could lead to money moving out from emerging markets to the US.

• ·        Europe – has a series of events which will unfold this year:

o   The aftermath of the Brexit vote and Britain’s trade negotiations

o   Elections in Germany (September), France (April 23) and The Netherlands (March 15)

o   Referendum in Italy

o   the finalization of the third Greek support package

• ·       The Chinese bubble – The real situation in China continues to be uncertain. According to experts, this is a bubble which could unravel any time (though no one can put a finger on the time).

• ·       Oil prices – continue to rise and are currently @ $55-levels. For us in India, it is a growing matter of concern as the Govt. has done all its fiscal math based on a maximum of $60. Estimates say this level will be breached in 2017. So, the Govt. calculations could go awry if the price of oil grows beyond the $60 levels.

• ·       Elections in India – UP, Punjab Uttarakhand, Manipur and Goa go for elections in February-March, with results being declared on March 11, 2017.

• ·       Interest rates in India – G-Sec rates dropped significantly in the last quarter of 2016. Currently, the G-Sec. rates stand at around 6.5%. Most of the rate cutting has already happened. It could drop by another 0.5% or so over this year. A lot of this has already been passed on to the customer in terms of lower FD rates and lower home and car loan rates. I do not see scope for much more lowering. With banks being flush with funds currently (from demonetization) I think the rates are going to remain at these levels for some time now.

The Budget which is due on February 1, 2017 should be a harbinger of things to come. Fingers crossed till then.

 
Warm wishes to you and your family and a happy 2017.

Event-based investing – Is it the right way to go?

Last week was Akshaya Tritiya -- an auspicious day for Hindus and Jains. Over time the significance of the day has got lost in the cacophony of gold marketing companies. Newspapers, magazines and television channels are full of advertisements mentioning the importance of buying gold on this day. 

Throughout the year, days like Akshaya Tritiya are hyped in the media to lure the unsuspecting investor. Another such day is Dhanteras (just before Diwali). Not that there is anything wrong in investing on these days. But investing has to be methodical, and not driven by festivals and marketing strategies. They should be the exception and not the rule.

Most investors invest erratically – such as on their children’s birthdays and during ‘JFM’ (January, February, March) to ensure some income tax deduction. The idea behind such haphazard investments maybe good. But then such investments start and end on that very day. There are no further investments till another auspicious day, or a birthday or the JFM period arrives.

There are several pitfalls of engaging in event-based investing are:

Firstly, what this results in is an ad hoc, unfocussed investing pattern which really does not get you anywhere. The amount of investment purely depends on availability of funds on that particular day. There is no fixed amount being invested. Such haphazard investment will not lead you to your goal.

Secondly, though there could be a goal mapped to a particular investment, generally such investments are not backed by any mathematical calculation. Investors don’t address questions  such as – how much do I need at the end of the term?; have I accounted for inflation while computing the goal?  It’s a simple exercise of stashing away funds.

Thirdly, in cases where the saving is forced (such as in tax-saving investments), there is obviously no goal. In most cases, there is focus on the product too. It’s a simple rush-job to meet the deadline. Most people are not even aware where they have dumped the money, let alone looking at returns.

Fourthly, there is quite obviously no analysis or research done on whether the product is suitable for you or not. Such investors neither do a risk analysis nor have look at their asset allocation. Their decisions are based on hearsay and tradition. This generally leads to a situation where they put all the eggs in one basket.

Fifthly, because of the demand pressure, the price (typically of gold) tends to move up. With a ‘single-day’ lump sum investment being made on these days, you tend to buy at the highest point with no chance of getting the benefit of ‘rupee cost averaging’. In the long run (of say 15-20 years), this generally does not give you the best possible returns.

 

People who engage in ‘event-based’ investing believe that they are ‘planning’. But in reality, they are only planning to fail. With little or no mind put to various critical issues, the end result can only be a disaster. So I would suggest that put away additional amounts on such events, but plan your investments across the year through proper financial planning. Achieve your goals in a planned and focussed manner, leading your family to financial wellness.

Don’t place all your eggs in the ‘property’ basket

In September this year, I met Deepak and Saloni – a DINK (double income, no kids) couple – who wanted my financial planning services. This young couple earned well, but had parked all their investments in one asset class – property. They had a portfolio of five houses, a term plan, a mutual funds portfolio worth a few thousands and some shares. We started discussions  0n  financial planning. By the time I visited them again – in October – they had added one more property to their list.

I had another interaction with a couple in their forties with a similar story – they too had parked all their investments in property. Four, to be precise. The rest of their money lay in their savings account.

A recent email from a client mentioned that “I am also actively considering investing in real estate - sometime after July next year by re-allocating funds from the MF portfolio... as real estate tends to provide the best long term appreciation.”

We have been taught to ‘invest in property and LIC policies, as their value never goes down and will always fetch you positive returns’.

In the cases I have listed above, and plenty more, property is only investment asset class. There seems to be a craze for buying property so much so that we tend to lose focus on all other forms of investments. This has been further ‘confirmed’ by the boom in real estate over the past 7-8 years.

Disadvantage of investing only in property:

• ·     The biggest disadvantage with real estate is that it is an illiquid investment.

• · You need to spend on its maintenance and also pay taxes and duties.

• · Speculation is rampant in the real estate industry. These speculators make lump-sum purchases during a boom, without bothering about the purchasing cost and the ongoing costs such as maintenance.

Now, I am not implying that real estate is a bad instrument for investment. But it becomes dangerous when it is the only asset class that one invests in. Here, of course, I should mention that the ‘first house’ (which is bought for the purpose of residence) is not being included assuming that it is not for resale.

With the ‘pressure’ created by real estate brokers and builders that the rates are going up every day, lay investors fall for the trap, thinking that it is now or never. With property prices sky-rocketing across urban and semi-urban areas, larger chunks of money are required to fund even the down-payment. For a salaried person, this may not always be easy.

A number of investors fall for the “initial payment of 10 percent only” trap. Without even calculating how they will service the balance down payment and subsequent equated monthly instalments (EMIs), people rush in in the hope of making a quick buck. They often sell-off the booking when the second instalment becomes due. This is a gamble which could go seriously wrong.

With financial planning and proper management, you can own your dream house.

A few points that one should keep in mind before investing only in property:

• Illiquid asset: Since it is an illiquid asset, it can have serious repercussions in case there is an emergency. Lack of liquidity can lead to a distress sale. If there is a medical emergency and you require a few lakh rupees, you would have no choice but to sell off the house (which could be worth  much more) to fund that immediate requirement.

• Property prices can fall: We have an innate ‘belief’ that the prices of property only go up. This is a generalised statement. It could always happen that the area / locality / city where you have purchased your property may not grow due to certain factors, beyond your control.

• Long-term returns may not be the best: Another strong notion that we carry is that property gives the best returns in the long term. Now this is true depending on your definition of ‘long-term’. If in your definition, long-term is 3-5 years, then you may be right. But it has been seen that over 25-30 year periods, equities have delivered the best returns. There are studies to prove this.

• Can affect your goals: Financial planning through property alone  is like putting all your eggs in one basket. It can affect meeting your goals since there may not be a buyer when you wish to sell, at the time of your goal.

One should have a robust, diversified and liquid portfolio, to ensure sufficient liquidity before ‘investing’ in property. 

People should carefully plan their investments to meet their goals in an organised and structured manner with due importance to asset allocation. Putting all the eggs in to one basket  could lead to severe consequences.