Wise Wealth Advisors

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

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Archive for the ‘Mutual Funds’ Category

Peter Lynch on market timing

Posted by Muthu on November 19, 2017

Peter Lynch was one of the best fund managers. He managed a fund called Fidelity Magellan Fund for 13 years, between 1977 and 1990. $1000 invested in 1977 in his fund has become $28,000 in 1990. Money multiplied by 28 times in 13 years, annualised return of 29.21%

I was reading one of his interviews today. Thanks to @stocknladdr  for sharing the link. As you know, we are always against market timing. In our opinion, you should invest when you have money and redeem when you need money, ensuring at least there is a 10 year time period in between.

Peter Lynch has provided a study on market timing. Let us listen to him in his own words.

“People spend all this time trying to figure out “What time of the year should I make an investment? When should I invest?” And it’s such a waste of time. It’s so futile. I did a great study, it’s an amazing exercise.

In the 30 years, 1965 to 1995, if you had invested a thousand dollars, you had incredible good luck, you invested at the low of the year, you picked the low day of the year, you put your thousand dollars in, your return would have been 11.7% compounded.

Now some poor unlucky soul, the Jackie Gleason of the world, put in the high of the year. He or she picked the high of the year; put their thousand dollars in at the peak every single time, miserable record, 30 years in a row, picked the high of the year. Their return was 10.6%. That’s the only difference between the high of the year and the low of the year.

Some other person put in the first day of the year, their return was 11%. I mean the odds of that are very little, but people spend an unbelievable amount of mental energy trying to pick what the market’s going to do, what time of the year to buy it. It’s just not worth it.

Excellent timing returned 11.7%. Lousy timing gave 10.6% and disciplined investing provided 11%. Always keep this in mind and stay the course.

Wishing you a wonderful week ahead.

Posted in Mutual Funds, Stock Market, Wealth | 5 Comments »

Simple yet effective

Posted by Muthu on October 28, 2017

Walking thirty minutes a day is good for health. Eating simple vegetarian diet is also considered good for health. But not all of us walk or eat simple food. There is nothing great in the suggestion to walk or have good diet. These are very simple suggestions but are extremely effective if followed upon.

SIP is also a very simple idea of investing a fixed sum every month for many years. There are few million SIP investors in the country. I would not be surprised if it becomes tens of millions over next one decade. As we’ve seen above being simple or common does not mean it is inferior. All of you have been SIP investors for long with a minimum commitment period of one decade. You’re already seeing the result of this simple method.

I was reading Mutual Fund Insight magazine of this month. One example attracted my attention and thought of sharing the same. If you’ve started investing 20 years ago, Rs.10,000 a month in HDFC Tax Saver and increased the contribution by 10% every year, you would have invested Rs.68.7 lakhs over  last 20 years. The value of the same now is Rs.7.06 crores, an annualised return of 24.78%.

Who would have got this return? Someone who invested for 20 years, while increasing SIP contribution regularly, completely ignoring plenty of bad news which he kept hearing frequently and staying the course without wavering.  This sounds very simple but extremely difficult to follow.

All of you, our clients, are sticking to this simple but effective discipline. You’ve achieved what is behaviourally difficult for many investors to achieve. We would continue to offer simple and effective solutions while ensuring you stay the course.

We may not get in future the kind of returns an investor would have got in the example cited above. But equity is the best asset class to own in India for long term. The returns would be superior to what we can get elsewhere.

In personal finance and investing, simplicity triumphs complexity by a wide margin. What is simple is also mostly effective.

Keep up the behaviour and continue to stay the course.

Posted in Mutual Funds, SIP, Wealth | 2 Comments »

Some changes expected in next 5 years

Posted by Muthu on October 21, 2017

I anticipate some changes to take place in next 5 years or so. Though I cannot precisely time, I strongly feel this is the way forward.

As a first step, expense ratios of mutual funds would come down. This would lead to reduction in income for mutual fund companies and advisors. As an investor, it is good for you because the return goes up to the extent of cost reduction.

As a next stop, expense ratio would further come down leading to zero commission income for us. We would be asked to become RIA (Registered Investment Advisor) and charge you a fee. Those who pay fee would continue to get advice and service. Those who cannot or do not want to pay need to take care of their affairs on their own.

Actively managed funds are broadly doing well now because mutual funds are still not a very significant percentage of total market size. At some point, due to growth in their size, they will become THE market. Once they become the market, they cannot outperform markets. As an investor, you may then want to own passive funds. Passive funds simply invest in broader indices like Nifty 50 or Nifty 500 for a very low cost. ETFs (Exchange Traded Funds) listed in stock exchanges would also come into being which also can be owned at very low cost.

The expense ratio paid is worth now because of the alpha (excess returns over benchmarks). When alpha is no longer there, cost cannot be justified.

Not only costs would come down, the returns also would be down. When there is no alpha you get only market returns. This would have huge impact on the entire eco system of investors, asset management companies, advisors and distributors.

It is our responsibility to advice you on the above as and when we feel the time is ripe. As I said, I see it happening within 5 years or so.

We would then tell you whether to only own passive funds or some combination of active, passive and ETFs.

These changes would not be limited only to equity but for hybrid products like MIPs and balanced funds as well.

For those of you who would continue to be with us when our revenue model changes from commission to fee, our advice and services would continue as usual.

This is the way forward.

There is nothing you need to do now on this communication. It is just to keep you updated on the changing landscape in coming years.

When the time for change come, we would handhold you.

Despite any changes, we would continue to assist you in reaching your financial goals, financial independence, building and managing wealth.

Whether it is active or passive, funds or ETFs, commission or fee our focus would be on you and your behaviour. In any form, we would continue to focus on right behaviour of discipline, patience and staying the course.

Have a nice weekend.

Posted in General, Mutual Funds | 2 Comments »

It all boils down to patience

Posted by Muthu on October 1, 2017

Over a decade, I’ve been writing about the same few things again and again.

Each time, I try to write a little bit differently so that you don’t find it repetitive and boring.

Having been our clients for long, you now know gains are lumpy. It happens in spurts. There is no way to time the entry and exit and we stay invested for long to get the benefit.

There are years of high returns, low returns, zero returns and negative returns.

The expected returns of 15% from equity funds over a decade consist of all such periods.

I want to give you today two examples I came across in the book ‘The Thoughtful Investor’ by Basant Maheshwari.

From 1984 to 2013, Asian Paints has multiplied investor wealth by 1767 times, annualised return of 29.4%

Rs.1 lakh invested would have become Rs.17.67 crores over a 29 year period.

An investor would not have got 29.4% every year. As mentioned, he would have had many years of zero and negative returns as well. In fact though the business was growing, from 1992 to 2002, for 10 long years, Asian Paints went up only by 3 times. Someone who sold out of frustration would have lost this precious wealth creation opportunity.

From 1984 to 2013, Nestle has multiplied investor wealth by 322 times, annualised return of 22%.

Rs.1 lakh invested would have become Rs.3.22 crores over a 29 year period.

Here too an investor would not have got 22% every year.

In fact, for seven long years, from 1999 to 2005, the price did not move at all though the business was growing. If an investor would have sold out of frustration, he would have missed the share price multiplying 10 times in subsequent 8 years.

You’ve seen both bull and bear cycles. You’ve also seen periods where nothing seems to happen. But over a 10 year period, you’ve made decent returns.

This is how markets work and this is how it would continue to work.

In market linked products don’t look for yearly performance. Look for what happens over years.

Patience is your biggest edge. Markets would always reward you for the same.

Posted in Mutual Funds, Stock Market, Wealth | Leave a Comment »

Underperformance is inevitable

Posted by Muthu on September 23, 2017

I always get queries as to why we rarely churn the portfolio. We could always keep changing portfolio based on recent performance and convince you how much we add value to your portfolio. That is an easy path. Why we have chosen the difficult path? Why we prefer inactivity? Why we discourage you from chasing performance?

Based on our experience, we tell you that all funds and fund managers go through periods of underperformance. What matters is the long term track record and not a specific period of underperformance.

I recently came across a study done by Davis Advisors. They have found that all good investors, funds and fund managers underperform around one third of the time. The funds which ends up in top quartile over a 10 year period spends not less than 3 years in bottom quartile. During one third of the time, all long term best performers become worst performers.

We’re committed to provide you long term superior performance and not to keep chasing performance and provide suboptimal returns. Vanguard studies have also shown that performance chasing hurts long term returns significantly where as buy and hold strategy offer good returns. I’ve shared this Vanguard study earlier.

I also shared with you a study came in ‘Mutual Fund Insight’. If you’ve invested in a large cap fund in 2007 and kept changing the same each year based on the previous year top performer, you would have got an annualised return of 3.93%. Whereas buying a fund in 2007 and holding it for 10 years would have delivered an annualised return of 12.84%

Not that we keep quiet during periods of underperformance. We speak to fund houses and regularly keep getting their inputs. Most of the time we feel the issues are temporary and were subsequently proven accordingly. In rare instances, where we believe the future may not pan out well, we recommend change.

So please look at overall portfolio performance and not each fund’s performance. Since you hold around five funds, it is most likely one of them would always be going through a period of underperformance.

Our idea of value creation is not through activities. It is easy for us to do some tinkering frequently and show you action. We’ll never do that. What matters to us is you should reach your financial goals, build wealth and attain financial independence. We would hand hold you through various business and market cycles and help you reach there. We’ll do only what is required. Many a times not tinkering with your portfolio and not allowing you to do so in itself is a big value addition.

Don’t equate activity with progress. Investing is one area where activities should be minimal. Neither you should chase performance nor ask us to do it.

Underperformance is inevitable. Keep this in mind when you look at your portfolio.

Posted in General, Mutual Funds | 1 Comment »