Wise Wealth Advisors

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

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Simple but very powerful

Posted by Muthu on December 1, 2012

Our clients (with a small exception:-)) are very disciplined and committed towards regular monthly investing for a long term.

Why this statement? 

Because we may forget how powerful is above, in an economy which is in the structural long term growth. 

I was doing some simulations based on the period I, some of my friends and colleague started our career in a meaningful way, in terms of salary:-) I’ve not taken high end income from our group but based on what is called average in the industry we belonged to and the roles we did. 

What this average guy would have invested?  Let us call him Mani.15 years ago; he had the ability to invest 3K per month. It became 7K, 12 years ago, 17K for last 10 years and 30K for last 5 years. 

So starting with 3K per month, over a period of 15 years he has increased it to 30K per month. Since we also top up once in a while, for ease of calculation, I’ve taken one time top up of Rs.3 lakh 10 years ago. A one time lump sum of Rs.3 lakh was not impossible for a manager and above in the industry I worked. For example, 12 years ago, I was offered a retention bonus of Rs.1.5 lakh for not quitting the company. Result? I still quit because the new company offered 100% hike in my salary. With in 8 months, another company offered 60% more than what the 100% one offered. God bless competition:-)

The salary increase was not due to any increased competence or responsibilities but pure demand. Any market, including job market, many a times is irrational, which is good if you are on the right side.

Coming back to Mani, from 3K to 30K per month, major sum added only in the last 5 years of his 15 year investment tenure, with one time top up of 3L 10 years ago, he will have Rs.1.54 crore as on date. This is despite paying home loan EMI and an urban middle class life style like having a Sedan, going to Inox or Escape in the weekends. Time is very powerful in equity markets because of compounding at a higher rate.

I played around with this example in some of the funds in our recommended list. Finally I chose a diversified equity fund to illustrate above and not a mid or small cap fund. Likewise I completely ignored thematic and sectoral funds, which you know we rarely recommend.

Even in the fund houses we like, we recommend only the funds we like. After all analysis, data, discussion with the AMC officials and lot of reading, the key question I ask is will I invest in this? If it is no, it is never recommended to you though the fund may look good. Is the process subjective? Yes. But it has helped me and you and lot. This I’m saying based on the performance of our portfolios, especially limiting the down side risk as the markets have been in a choppy phase for last 5 years. We’re sincere and honest but cannot be objective. All I can tell you is that my subjectivity impacts my wealth in the same way as yours.

Seeing the 5 year portfolio of our clients, despite market (Sensex) being lower than it’s 5 year high, I’m satisfied with the performance. I see returns in double digit or in some cases higher single digit. The return may not look appealing per se. But in the context of market conditions in the last 5 years, it immediately looks better. Despite bear market, the returns are mostly better than fixed income instruments, with zero taxation.  

As I’ve written before, I’ve strong conviction about equity doing well in this decade and next. A long bear market cycle would be followed a good bull market as the earnings are growing and CAPEX cycle is likely to pick up soon. Reversion to the mean is the rule of the markets and so what has gone down will rise again.

Please ignore the market conditions and just keep doing your SIP. Like Mani, make it a point to increase your SIP amount, preferably ever year, atleast by 10%. Budgeting would rarely work like dieting. So make it a point spend only what is left after investing.

The industry likes to make simple things complex. So there are many variants of SIP- daily weekly, flexi…. The current issue of Mutual Fund Insight mentions that the difference between doing a daily and monthly SIP in Sensex over last 32 years is just 0.03%.Not worth it. Many try to promote value averaging. Not a bad concept. But very cumber some. Long term studies (15 to 20 years) show an advantage of only 0.5% to 1%. May work unfavorably in a prolonged bull market. Like your salary or rent is fixed and paid monthly, do the same for SIP. As salary and rent is revised periodically, again do the same for SIP.

You might have seen market going up by more than 800 points in the last 4 trading days. This is very normal. The rise or fall mostly happens in spurts and not in a methodical way. That’s why we again and again and again… reiterate the importance of staying invested for a long run and not coming in and going our periodically.

The kind of increase you saw this week is called as ‘best days’ in the Market.

As per this study by Fidelity,

Let us take an Eleven year period – October 2001 to October 2012.

Remember this period contains the most spectacular rise and fall in the stock markets.

Let us assume you’ve invested in Sensex during the above 11 year period. Of course good diversified equity funds have provided far superior returns than Sensex. You may visit our ‘SIP Crorepathi’ page for more details.

During the last eleven year period, if an investor would have missed out just ten best days in the stock market, a sum of Rs. 100,000 would have returned only Rs. 2,50,270  as opposed to Rs. 5,33,180 had he stayed fully invested.

For staying invested, the absolute return is 533%. For missing best ten days, the absolute return is  250%. Missing just best ten days costing you a difference of 283%! Can you believe it?

An amount of Rs.1,00,000 invested eleven years before in Sensex is worth following:

Remain Invested – Rs.5,33,180 (16.43% CAGR)

Missed best 10 days – Rs.2,50,270 (8.69% CAGR)

Missed best 20 days- Rs.1,47,330 (3.58% CAGR)

Missed best 30 days- Rs.93,490 (Negative returns)

Missed best 40 days – Rs.63,440 (Negative returns)

The cost of missing best 10 days is Rs.2,82,910 (roughly 3 times your capital) where as cost of missing best 40 days is Rs.4,69,320 (4.7 times your capital).

Infact your capital would have got significantly eroded if you’ve missed the best 30 and 40 days.

For missing just best 20 days, you would have merely received closer to savings bank interest.

Tell me honestly, in hindsight, how many of us would have been able to predict the best 10 days during the last 10 years leave alone predicting the best 40 days?

How many of us knew last week that this week market would gain more than 800 points?

Markets can gain or lose even 10% in a single day.

The myth is that, timing is essential to generate high returns.

The Reality is that, it is the time and not the timing that matters

Even if it is a repetition, I don’t mind saying simple and powerful things again and again. Just continue your SIPs, increase when possible and just see where you stand at the end of the current decade. You’ll be impressed with the results.

Even for MIPs, some lose patience with in a year or so. Always look for 5 year averages. Even now, despite interest rate cycle yet to go firmly in to the downward trend, the 5 years performance of our recommended list looks good. We can advice, monitor your investments, periodically review and discuss your life and financial situation and service you. These would not be of any use with out patience and discipline from you. This determines whether you achieve the financial success or otherwise.

You can be absolutely convinced we would tell you what we consider appropriate and what we do or will do with our own money. There can be a possibility of error in judgement but never ever in intent.

Since I’ve mentioned about past returns, don’t forget to read the disclaimer.

Why the character is named Mani? It’s one of the common names in this part of the country and sounds like money:-)

3 Responses to “Simple but very powerful”

  1. Ash said

    I saw a financial planner on TV mention that 25% of ones income* should be invested. I am presuming income after tax. What is the general feel good %age for a person with no EMI’s you propose. I know fin planning is more involved than a figure of thumb rule. But want to know your general thoughts to this. Please reply.

    • Muthu said

      As I mentioned else where in the blog, my preferred saving rate is also 25%:-) The percentage would be higher for high income category and vice versa. ‘Personal Finance’ is more personal than finance:-)

  2. Govindarajan said

    Posting the same comment which I had posted in your recent article…sorry for making this redundant…

    The important point is hit rate in equity is very less. What if some one has chosen stock like Ceat or Century Textiles and held on to it till they realize that it is not worth to hold further. Opporunity will be lost in such cases though we would have spent considerable period of their investment horizon. Hit rate in Realestate is more thats why people prefer RE. In your analysis on Equity mutual funds returns it is unfair on your part to compare real estate price appreciation with a diversified mutual fund Growth option (where dividends are re-invested). We need to see price appreciation with compounded re-investment of rental income also. Also diversified equity fund is a combination of several stocks from different sector and growth phases. So we need to compare a realestate index (if one is available?) having constituents from all areas of Chennai. Am I correct? Anyway equity or RE it is the selection at right price and holding on to them for long will result in capital appreciation (while re-investing dividends/rental)

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