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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Worried about financial markets?

Posted by Muthu on June 21, 2011

I come across people who are worried about high inflation, raising interest rates, lack luster performance of our stock markets this year, global economic scenario etc. 

Our worries are amplified by screaming headlines and news in business media. And to some extent, even the main stream media are covering this, as they want to provide feeder for our worry. It’s always negative news that sells faster.

 I’m not going to ask you not to worry. Worrying is one of our birth rights and if we want, we can keep it. I exercise this birth right quite often, though not on financial markets.

 Now a days I read or watch business media only to get the facts and some good interviews. I’m not bothered about the opinions.

I’ve developed my own perspective with trail and error during last 2 decades and it is helping me well both in managing my family finances and that of my clients.

I’ve been deeply interested in markets since 1991- when I was studying in college. That is what prompted me to spend some initial years of my career with a stock broking firm.

In the first 10 years, I almost did everything I’m advising you against. I traded in stock markets – made some, lost some – basically zero sum game. Even though I started investing even in mutual funds from 1998-99, I used to churn a lot, invest in sectoral funds etc. Infact I invested Rs.1 lakh (which was a very big money for me then) in Alliance New Millennium fund which invested only in ‘new age’ stocks like technology and saw my investment getting eroded by 70% (I hope my memory is accurate).

The icing on the cake is I took a personal loan at a high interest rate then to fund the above investment! My loss got compounded both by the loss of value of investment and the high interest and principal which I paid back to the bank. Dear HDFC Bank, I wish you’ve denied my request for that loan!

Destiny took me to U.S. in the year 2000 and with a 24 hour internet access (which was a luxury then) and nothing else to do in my free time; I started introspecting as to why I’m unable to make any money in the markets.

‘Ask Jeeves’ was the most popular search engine then and while looking of answers, I stumbled upon Warren Buffett. It would not be an exaggeration if I say that I read anything and everything about Buffett both through web and books in the year 2000-01.

Not only there was total shift in my investment perspective, I started developing enormous interest on the entire gamut of personal finance.

I squared off all my loans and started with a minimum networth. Again destiny smiled. After return from  U.S., my salary in 2001 was Rs.50K per month. For a 28 year old guy, in non-IT field or for that matter in any field then, this was considered a very decent salary.

I always live below my means. That was more so then as having learnt some ‘secrets’ from Master Buffett, every rupee counted for building wealth. I saved 80% of my salary from 2001 to 2004. I lived in a rented house till then, used to travel only by motor bike or public transport.

Once I got married in Nov.’04, this kind of savings became impossible! But I’ve put a financial foundation by then. Also from managing individual finance, it became family finance. We bought our home and car and significantly improved our life style.

Some of the investment decisions I took between 2000 and 2004, aided by subsequent bull market changed my financial destiny.

If you think, the year 2000-2003 was an optimistic period for investment, it was not. There was a global crash and obituary was written for stock markets. Fall of Enron, Worldcom, Arthur Anderson etc. triggered stronger panic than the 1997 Asian crisis.

The twin tower attack created so much uncertainty that was turmoil and distress in financial markets. There was fear, fear everywhere.

In India, government was struggling against global economic sanctions due to testing of nuclear capabilities.

As far as investments in markets are concerned, what matters are courage, conviction and patience. Everything else is secondary.

Leave alone equity, it holds good as well for debt oriented funds like MIPs.

If you’ve been investing in FDs for the last 15 years, I need not convince you about how cyclical interest rates are. The same holds good for inflation too. You would have got higher FD returns in the periods of higher inflation and vice versa. What matter is the real rate of return; the difference between the interest rate and inflation. There is no use looking at the interest rates offered by FDs without keeping this in mind.

Again interest rates are correlated to inflation.

When WPI inflation was above 12% in 2008, medias screamed that it may even touch 18% or more, making the interest rates at 20%+!

Market doesn’t care a damn about what any one of us think; the inflation became negative in 2009! It was -1.61%, the lowest in the last 3 decades. We then saw many articles as to how deflation is going to derail our economy and get us into recession and negative growth.

In a speech made last year, the executive director of the RBI, Deepak Mohanty summed up the last 6 decades of inflation history inIndia:

“Going by the current experience of 5-6 months of double digit inflation as high, one can trace 9 such episodes in the last 56 years. Out of these 9 episodes, double digit inflation lasting beyond a year occurred on 5 occasions.  The most prolonged one lasted for 30 months during October 1972 to March 1975.  The last such high inflation was in the mid-1990s which lasted 15 months between March 1994 and May 1995.”

So if there is a good monsoon this year, oil prices doesn’t shoot up, we may all be singing differently about inflation and interest rates next year.

That is why even a debt oriented product like MIP is positioned by us for a period of 5 years. As interest rates are also cyclical, one need to be patient without looking at NAV. The 5 year rolling averages return would be good. In short term, when interest rates harden, MIPs would under perform FDs. What you need to do? Nothing. Develop a medium term perspective of 5 years for MIPs, instead of  looking at one or 2 years. You would be rewarded for change in this perspective.

Once we understand deeply (it should sink inside) the cyclical nature of markets, inflation and interest rate, we can start worrying about some thing else other than markets.

Don’t think I’m living in a fool’s paradise. I understand the precarious position of many countries inEurope, the weak position of U.S. etc. If and when a major collapse happens there, the ripple effects cannot be avoided here.

Even then, what you should note is that only the price of assets may get depressed, the value would remain intact. There is no point worrying about short term movement of prices when the underlying value is intact.

It may sound strange; but in such a scenario there is a possibility more foreign money may move intoIndia. Looks unlikely? Look back at what happened in 2009, after 2008 global crisis.

As Aditya Puri mentioned recently, in such a worst case scenario, our economy may temporarily grow at 7% instead of recent 9% or projected double digits. Still, this kind of return would not be possible anywhere else in the world for an economy of this size.

I came across a data recently which I thought of sharing with you. In the period between January 1’st 1926 to December 31’st 2009, 84 years, long term by any standard, in U.S., the average inflation during the above period was 3%

The annualized returns of various asset classes during this 84 year period are as follows:

30 days treasury bill: 3.7%

20 year Govt. bonds : 5.4%

Shares (Stock market): 9.9%

Gold: 4.7%

Real estate: 0.70%

Average inflation: 3%

The above number says it all. As we all know U.S. history during last one century – world wars, other wars, great depression, booms and bursts, inflation cycles, interest rate cycles, economic growth – the above number accounts for all.

Invest regularly and invest for long term. No need to worry whether it is a bull or bear market for this purpose. Use panic in the market for making lump sum investments, when the valuations are attractive, as it is now. In the time of euphoria, never make lump sum investments and also do not stop your SIPs. Use such opportunities for rebalancing your portfolio in tune with your asset allocation.

I only hope that all of us have courage, conviction and patience to get the best out of the golden period of Indian equity market.

2 Responses to “Worried about financial markets?”

  1. Raja said

    Very well said. Been following your site for a while now and got to learn lot of good things 🙂 Thank You!

  2. trupti said

    well written article. in the current world of manipulated media news such truthful articles helps the investors like us.

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