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

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Seven Up

Posted by Muthu on January 1, 2013

Wishing you a very happy and wonderful 2013. 

Today is our birthday:-) We’ve completed six and entering into 7th year of our profession. For those of you who may not know, I quit my last employer in mid December 2006 and ventured into profession formally on January 1’st 2007.

Thanks to you; the journey has been enjoyable so far. 

The world did not end on 21’st December and some are really disappointed because of the same:-) One of our neighbours flew to their home town and has returned back few days ago. Some one told that they wanted to be with their kith and kin at the time of end! My barber and his friends closed their shop and waited for hours in Elliots beach to see sea entering Chennai. I asked why he went near the sea if he knew sea water will flood Chennai. He said that daily life is boring and it was exciting to see the world ending. I think he spoke the truth. For most who is interested in destruction of world, Pralaya, after life wonders… they do so because they find the current life boring and burden some. We don’t even mind death of us and others if it means a one day excitement?!

When Tsunami stuck Chennai 8 years ago, many who did not know what a Tsunami was (it was first time ever Tsunami has stuck Chennai), spoke about end of Kali, Pralaya etc. Nothing goes on forever and human race or our planet may end at some point of time. It can even be after millions of years or just next year if nuclear weapons are released extensively over the planet.  If science is to be believed, atleast another 4500000000 crore years to go before the end. I’m amused by the way some of us reacted to Mayan Calendar episode. 

Not many of us may remember. 20 years ago there was a sudden frenzy one day that Vinayaga started drinking milk offered by devotees. No Vinayaga idol or picture was spared and the whole nation went on feeding spree. Some swamijis and astrologers claimed that it is they who invoked Vinayaga to drink milk. I was working in a stock broking firm then and could not have tea that afternoon as the tea shop was closed for want of milk. As a crowd, our degree of madness can never be predicted neither in life nor in markets. 

Some people were talking about a different end of the world 4 years ago. Some still believe that fall of Lehman brothers is end of the economic civilisation. Despite the great financial crisis 4 years ago, many parts of the world are limping back to normality. The US did not get destroyed as many envisaged (civil war, riots etc.). In fact it now looks like US may become energy sufficient in next 10 years and can even become an exporter of the same.

Economy and financial markets always behave this way and boom and burst are normal. I like them precisely for the way they correct excesses. Cycles are necessary and even healthy for the system to survive. When all one knows is that the recent bear market or recession and not loads of history available before that, the world will look only gloomy. Likewise during the last bull market, many first timers thought that the markets only goes up and set 40% or 50% per annum as expected returns!

Sensex is up by 25.7% in 2012 and many equity funds which are part of our recommended portfolios did much better. In 2011, the expert predictions for 2012 was poor market performance, Sensex at levels of 12000 etc. As we’ve been saying repeatedly, nobody including us can do any meaningful near term prediction. Last year we suggested you to stay the course resulting in you benefiting from the market gains. In market, success accrue to people who follow a system both in good and bad years; more so in bad years when one’s patience is tested.

As far as equities (portfolio of stocks, not individual stocks), I neither believe in timing nor I have ability to do so. ‘Timing’ is applicable only in 3 contexts – making lump sum investments when valuations are attractive, not making lump sum investments when valuations are expensive, planning for phased withdrawal few years before you reach your designated goal. Otherwise just keep investing regularly in the portfolio we’ve recommended for you with periodical review and asset allocation.

The very idea of investing a fixed amount monthly, for a long period of time is to avoid timing the market. We have been very vocal and repetitive in recommending this as the best strategy. So we would not suggest timing the SIPs like when you  should stop, when you should continue again etc. depending on the market conditions. If I start this approach, then it shows I’ve ability to time the markets. Then there is no need for any systematic investment at all.  

I just checked the performance of one of the funds we suggest. As of 30th November 2012, the 10 years and 15 years annualized return of the same is  22.32% and 26.27% respectively. I’m not even remotely suggesting that these are the kinds of return you would get in long run.  This may or may not happen. As you are aware, these are not guaranteed products and past performance may or may not be repeated in future.

But what I want to point out is that this return has been made possible by investing regularly with out worrying whether it is bull or bear of flat market, ignoring economic and financial forecasts emanating from media day by day, minute by minute. At this point, when we look at the above returns, we are not in a bull market, but in a range bound market for the last 5 years (we are yet to touch the previous 5 year high). This shows the power of equity over long term, which in my opinion is not less than 10 years.

There is some thing called Dalbar studies in US. It regularly measures the investors return vis-à-vis the investment returns. In an ideal world, both should be the same. But the studies show that the gap between both is huge and can even be as high as 9% per annum.

To illustrate, if ABC fund’s last 5 years return is 18% (after expenses), the investors return in the fund should also be the same. But it is rarely the case. Why? As Dalbar studies points out investors invest a lot when the markets are high and redeem out of panic when things look like falling. Not only they do not invest at market lows but redeem then. Like wise instead of keeping quiet, they invest with enthusiasm, bulk amounts, when the markets are high.

There are enough indications of interest rate cuts this year. A lower interest rate usually has positive effect on stock markets as servicing debts become easier and CAPEX plans get kicked of.

Please continue to stay the course. As always, I would write to you individually in April along with your portfolio review and the way forward.

Being the first post for the year, I just want to touch upon basics. I’ve got some interesting queries on the last piece. I would address it in my next post. 

Once again, a very happy 2013.

4 Responses to “Seven Up”

  1. Niranjan said

    Happy New year and A Happy Birthday too !

    Regarding the ending of the world, I guess people are always excited at any news of catastrophe – which injects some form of excitement into their otherwise boring monotonous life.

    But at the same time people need assurances – they need someone to assure them that all will be fine, more so in matters concerning the financial markets. This may well explain what Warren Buffet said once, “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

  2. kishanm77 said

    Hello Muthu Sir,
    A very happy new year to you. May you be content and happy to the maximum. After all thats what is most important.

  3. Santosh Pawar said

    A very happy new year 2 u 2 sir. Hope to read many more of ur inspirational write ups.

  4. Milind said

    Happy New Year Muthu.I would like to thank you for all efforts and guidance you have given to lay Investors Like us.Many thx

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