Wise Wealth Advisors

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

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Archive for the ‘SIP’ Category

Don’t look frequently

Posted by Muthu on July 18, 2016

I wrote the last piece immediately after Brexit. Like many, I was also expecting the market to correct in the near future. Markets, as always unpredictable, have been moving up after the event.

This shows the difficulty of forecasting and predictions. That’s why it’s always best to ignore them and stay the course. Though at times I do anticipate some market movements, I don’t change my investment plan accordingly. I simply stay the course with my portfolio. As you are all aware, I do the same for you as well. Brexit or no Brexit, the only sane option is to continue your SIPs.

Like I’ve mentioned many times before, we don’t try to sell our house or land based on constant news flows and macro events. In fact, we are not even aware of their exact market value. We intend to own those assets for decades. The same yard stick needs to be applied for equity funds as well. I would like to share what Buffett says in this regard.

“Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of ‘Don’t just sit there, do something.’ For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”

One way to increase the tenure of equity ownership is not to look at the value frequently. Many investors’ emotions get as volatile as markets when they keep looking at prices or NAVs regularly.

The less frequent you see, higher the probability of positive returns. The more positive returns are, higher the motivation to stay the course.

I want to share with you what personal finance expert Carl Richards has mentioned in this regard.

“Since many of us use the Standard & Poor’s 500-stock index as a proxy for the market, let’s take a look at the period from 1950 to 2012 to see how often we’re likely to feel positive, based on how often we check our investments:

  • If you checked daily, it would be positive 52.8 percent of the time.
  • If you checked monthly, it would be positive 63.1 percent of the time.
  • If you checked quarterly, it would be positive 68.7 percent of the time.
  • If you checked annually, it would be positive 77.8 percent of the time.

So here’s the thing to ask yourself. Other than upsetting yourself half of the time, what good is it doing you to look anyway? Maybe we should all invest as if we’re going on a 12-month trek in Nepal!

So along with your do-nothing streak, let’s see how long you can go without looking at your investments (assuming you’re in a low-cost, diversified portfolio, of course). I think you’ll discover that it makes you happier, keeps you from doing something stupid and helps you become a more successful investor.”

As we never get tired of repeating, please check your mutual fund portfolio only once a year. This increases the probability of seeing positive returns. Positive returns would lead to better emotions and self control.

Treat equity funds the same way you treat your house. Don’t look at the value frequently.

Posted in Basics, Mutual Funds, SIP, Stock Market | 2 Comments »

Choosing the worst day for SIP

Posted by Muthu on December 17, 2015

I was going through a data in the investor education material provided by PPFAS mutual fund. I found it interesting and wanted to share the same with you.

We repeatedly tell you that what matters is buying wisely and then simply staying the course. There is no need to time the market. Investing all through ups and downs, across market cycles for a long term is the key to create wealth.

Let us assume 2 investors started investing Rs.10,000 a month in Sensex from January 1990. Like you, they are not smart enough to invest in good actively managed funds and instead have chosen Sensex.

Also like you they did not choose a fixed date for monthly SIP. They wanted to time the market and choose the lowest point for Sensex every month.

One of them was very lucky and was brilliantly able to do it. The other person was dumb like me who did not have the capacity to time the market and instead ended up choosing the highest point for Sensex every month.

Decades passed and after 26 years (25.91 to be precise), they wanted to compare their performance on 30th November 2015.

The brilliant investor, who always invested in the lowest point of Sensex every month, has created a tax free wealth of Rs.2.01 crores. This works out to an annualised return of 11.68%.

The dumb investor, who always invested in the highest point of Sensex every month, has created a tax free of wealth of Rs.1.88 crores. This works out to an annualised return of 11.32%.

The difference between most brilliant and the dumb is 0.36%.

What matters is the discipline and not how lucky or brilliant you are. In the above example, both chose wisely; diversified portfolio of stocks.

As long as you choose wisely; only open ended diversified equity funds and no closed ended NFOs, sectoral or thematic funds or individual stocks, then what matters is discipline of simply staying the course.

Why I’ve included individual stocks also because you need to time the entry and exit for stocks. Instead if you choose a portfolio of stocks like mutual funds or index; the fund manager or the exchange automatically takes care of entry and exit. ‘Buy & Hold’ is applicable to portfolio of stocks and would not always be applicable for individual stocks.

I want to tell you one more thing. Your mutual fund portfolio may consist of 5 or 6 funds. You need to only look at overall portfolio performance and not worry about relative under performance of one or two funds. In any portfolio, some funds would outperform and some underperform in a given year. If you a take a 10 year track record, any good fund would have gone through rough patch for 3 or 4 years. There is no fund or fund manager who can escape bad years. So it is better to look at 10 year averages. Funds need to be changed only if they consistently underperform benchmark over long run or there are any major negative issues happening in the fund house etc. Churning in the portfolio needs to be very minimal and done only when absolutely necessary.

If you keep churning, your returns would not be equal to fund’s long term returns. Despite being invested, many people don’t make good returns in equity funds because they chase performance; invest after few good quarters and redeem after few bad quarters.

We would be entering soon into 10th year of our profession. Clients who have been with us from beginning have seen excellent returns for last 9 years. Their returns are equal to what funds have actually provided. Investor returns is equal to investment returns. There is no loss or decrease in returns due to behaviour gap. The same holds good for clients who are with us for 8 years, 7 years etc.

Only around 2% of investors stay beyond 10 years in a fund and reap the benefit of long term compounding the fund has to offer. The remaining 98% keep churning, redeeming and lose out on the long term wealth creation.

We want all our clients to be amongst this precious 2%. So we’ll keep portfolio change or churning as minimal as possible.

We believe the greatest value addition we do is making you stay the course.

We request your co-operation on this so that you can create huge wealth through uninterrupted long term compounding.

Posted in SIP, Stock Market, Wealth | 5 Comments »

One kick 10,000 times

Posted by Muthu on June 6, 2015

“I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” -Bruce Lee

This quote talks about power of practice, perseverance and repetition.

It is said that 10,000 hours of practice makes one an expert in a particular field. Practising one kick 10,000 times makes one a master, an opponent to be feared by even by the likes of Bruce Lee.

By doing one thing, 120 times or 240 times, you also become a successful investor. That one thing is SIP. SIP over 10 (120 times) or 20 years (240 times) brings investment success.

Studies have found that only 5% of investors do better than an index fund. For remaining 95%, it is a losing game. Since actively managed funds (the kind of funds you are investing) do well in India, by investing regularly in them for long term, you beat most other investors including professionals.

We’ve mentioned about Dalbar studies which quantifies how investors earn significantly lesser than investment returns. 95% may fall into the category of investors who earn significantly lesser than investment returns. Only 5% may make it.

Those 5% are the ones who practice one kick, 10,000 times; who follow one habit of SIP regularly without fail, 240 times.

There is no need to learn 10,000 different things like analysing macro economics, geo political factors, technical analysis, quant theories etc. Practise just one thing, only one thing, do SIP regularly without breaking even one instalment for next 20 years. This one thing would make you successful and respected by the Bruce Lees of the investment world.

One kick, 10000 times = Successful martial artist

One method (SIP), 20 years = Successful investor

All the best.

Posted in SIP | 4 Comments »

Building a fortune-Rs.100 crores!

Posted by Muthu on May 22, 2015

You all have goals and you’re investing towards the same.

Other than your goals like retirement, child’s higher education etc.; have a goal of creating huge wealth in next 20 years.

We’ve seen through various examples how many funds have multiplied wealth by 40 times to 100 times during last 20 years.

We believe that equity funds would be able to provide 18% returns over next 2 decades; this means your wealth can multiply by 27 times in next 20 years.

At 18% annualised returns, every Rs.10,000 you invest per month, would be worth more than Rs.2 crores after 20 years.

Those of you who are investing for 5 years or more, regularly through SIPs, have already started experiencing the power of compounding and equity.

Those of you who have accumulated Rs.1 crore so far and doing a SIP of Rs.1 lakh per month (through equity funds), can expect to be worth around Rs.60 crores in next 20 years. That is USD 10 million in 20 years. You would be in top 1% of not only India’s population but the world population itself.

If you’ve Rs.50 lakhs invested in equity MF so far and is doing a SIP of Rs.50,000 per month, the value after 20 years would be Rs. 30 crores. With USD 5 million, you would also be in the cream of world population, top 1%.

The above numbers are arrived with the assumption of 18% annualised returns.

Someone who has Rs.2 crores in equity funds asked me how much he needs to save every month to achieve Rs.100 crore in 20 years; assuming 18% annualised returns. Roughly the amount works out to Rs.1.23 lakhs per month.

He asked how much that Rs.100 crore is worth today? Assuming a long term inflation rate of 6%, it is worth Rs.31 crores today. This means what you can buy with Rs.31 crores today; you can buy the same with Rs.100 crores 20 years down the line.

He was stunned by the power of equity, power of time and power of compounding. He has started investing Rs.1.5 lakhs every month.

As India moves from a low income per capita to a middle income per capita country, as we move from a $2 trillion to $20 trillion economy, over next 2 decades, with nominal GDP (real GDP + inflation) growth rate of around 15%, 18% annualized returns from stock market (equity funds) look very much possible.

As you are aware, stock market growth happens in spurts with a high degree of volatility. In bear markets, even a diversified equity fund falling by 40% or so is not uncommon.

You’re reaping rewards now for sitting tight in one bear market. Even in a secular growth country like India, we’ll go through couple of bull and bear cycles in next 2 decades. If you can sustain the temperament and the patience you’ve developed in last few years for next 2 decades, huge fortune is all yours.

The most difficult part of investing is staying the course for long run without worrying what is happening in the markets. If you can develop the right temperament to stay the course for long; you can build a great fortune from the markets- be it Rs.30 crores or Rs.60 crores or even Rs.100 crores.

Our family has achieved financial independence by following what we are repeatedly sharing with you. By teaching you, I learn and my conviction becomes stronger. I’m absolutely convinced that if one can master his behaviour, huge fortune can be made through markets over long run. Time and discipline is the key.

Our key focus and main job is to ensure that you invest regularly over long run and stay the course without break. Everything else is secondary. The daily sms, blogs or tweets are all aimed towards this purpose. As Munger says, repetition is the heart of instruction and we would repeat tirelessly for both your and our benefit.

Have a big goal, invest towards it regularly, give long time for compounding, stay the course and build a big fortune.

Posted in Mutual Funds, SIP, Stock Market, Wealth | 12 Comments »

Holding Period

Posted by Muthu on March 19, 2015

Recently I wrote about Dalbar studies and performance gap.

From 1984 to 2014, for a period of 30 years, the S&P 500 has given an annualised return of 11.11%. Whereas equity fund investors earned only average annual return of 3.69%. The performance gap is 7.42%.

Why performance gap? When a fund, after expenses, over a 10 year period, gives 18% returns, the investors also should have also made the same. But this rarely happens in a real life scenario. Investors invest more when the markets are high and redeem more when the markets are low. Added to that they keep chasing performance. A good fund is ditched because it had a bad year. A risky fund or not so good fund but which shows recent good performance gets lot of inflow. All these ensure that investors as a group earn less than what the funds provide. In many cases, people actually lose despite markets and funds doing well over a period.

Prashant Jain, one of the best fund managers in the country, in a recent interview has mentioned that only 2% of the AUM in HDFC Equity Fund is more than 10 years old.

I was going through an article in Business Standard today. AMFI (Association of Mutual Funds in India) has recently released some data. As per the same, 25% of the equity investors hold the fund for a period of 6 months or less. 50% of investors do not hold for more than 2 years. The median holding period of investors is barely 18 months to 24 months.

From what Prashant Jain has mentioned, hardly 2% of the investors may be holding funds for 10 years or above.

As Morgan Housel says, “The single most important variable for how you’ll do as an investor is how long you can stay invested… Time is massively powerful.

People who stay invested for 10 years or 20 years reap the benefit of time and compounding.

As I’ve emphasised many a times, you are rare ones. It’s rare for investors to have a long term vision of 20 years, ignoring ups and downs of the market, stay focused and stay the course.

We are lucky to have you as our clients. We have many clients who have been doing SIP without break for 8 years, 7 years and so on. Around 50% of our clients have been doing SIP for 5 years or more. People who became our clients from 2011 onwards would also be joining the above list in the years to come. They are also been regular in their SIPs for last 4 years, 3 years and so on.

At some point, we would have 90%+ our clients who have been doing SIP for 10 years or more against the industry average of 2%. The remaining 10% would have been new clients (i.e.) clients lesser than 10 years with us. We are focusing on creating a unique investor community of hundreds of families with real long term orientation and disciplined investing.

The steps to get rich are easy. But self mastery is extremely difficult. Discipline, patience and long term orientation are the key to self mastery in investments.

As an advisor, I’ve taken it on myself to ensure that you practice this self mastery. I would always stand by you and support you toward this.

In my professional life, I’ve a big ambition. I want hundreds of families to make huge wealth through equity investing by practicing this self mastery. By huge wealth I mean, tens of crores in many cases and 100+ crores in at least few cases.

Already many of you have been doing SIP for last many years. You’ve started seeing the results. You would be amazed to see how much you would be worth in next 10 to 20 years, if you continue in this path.

Stay the course.

Posted in Mutual Funds, SIP | Tagged: | 4 Comments »