Wise Wealth Advisors

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

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Archive for the ‘Wealth’ Category

Invest when you have money, redeem when you need money

Posted by Muthu on June 24, 2017

There is so much of confusion and discussion about whether markets would go higher or lower or stay flat from here.  I don’t know the answer. But so many experts have different answers; each according to how he sees it.

No one can get the answer correct. On each occasion, someone may get it right. But it would be different person on different occasions. No one consistently gets it right. Some people who have claimed to have seen 2008 crisis, was saying the same thing for very many years and one year they got it correct. Even the dead clock shows time correctly twice a day. If you keep saying regularly markets would correct by 20%, one day you would be proved correct. Likewise, if you keep saying regularly market would rise by 20%, one day you would be proved correct.

Market is an extremely complex mechanism. So many things affect it in the short term and it is very difficult to guess which way it will go. In the long run, only earnings and its growth impact a stock price.

The solution is owning an index or diversified equity funds or a portfolio of high quality companies for long run. Owning an index or diversified equity funds is a more passive activity and one has to be relatively more active in holding a portfolio of stocks.

Index has not been a great indicator of broader market movements in India. Index has given sub-optimal returns over last one decade whereas actively managed funds have delivered a better performance. So indexing is still some time away. As long as one avoids thematic and sectoral funds and invests in well diversified equity funds, there is no need to worry about timing.

Most of you are saving and investing for retirement. Retirement is usually spread over couple of decades. It is not a one time activity. Goals, which happens at a particular point of time, like daughter’s marriage need planning in advance in terms of withdrawal. Daughter’s higher education, which is usually spread over few years, also needs planning in advance for phased withdrawals.

Goals like retirement or building wealth which is spread over decades and even multiple generations needs no timing. It is better to be in equity over the accumulation phase. In distribution or retirement phase, one can have a mix of debt and equity. People who have built great wealth have done it through holding equities for decades without worrying about volatility. ‘Buy & Hold’ works well in a basket of stocks like index or diversified equity funds.

We always tend to extrapolate the present into future. In the beginning of 2016, when there was a bear market, experts were predicting further fall. But markets went up a lot post budget. Likewise when markets corrected during demonetisation, greater bear market and recession was predicted. But we’ve been in a bull market post demonetisation. Now everyone is predicting further heights. It may still rise or correct; we would only know in hindsight.

The markets are always volatile and would continue to be so. Every year, you can look forward to, may be two 10% corrections. One bear market (fall of above 20%) every few years is most likely to happen. This is how it has always been.

In a country like India, whose economy and corporates is expected to grow well over next one or two decades, stock market would also keep growing; but not without going through periodic cycles. If it takes 2 or 3 steps forward, you can definitely expect one step backward. It’s movement is going to be only like this. But every cycle would see new highs. But don’t look to time it. I cannot do it for you. Be skeptical about people who claim they can do it.

Once you invest in equity, simply stay the course.

But for few exceptions, the general rule is invest when you have money and redeem when you need money, ensuring at least there is a 10 year time period in between.

Posted in Wealth, Stock Market | Leave a Comment »

$1000 to $2 Million

Posted by Muthu on June 11, 2017

I always keep telling you not to time the market. Hopping in and out of the market leads only to wealth destruction or sub-optimal returns. Country like India is in a structural bull market. In the long run, markets only keep going up, with occasional corrections and bear markets. If you can stay the course, ignoring the pains of corrections and bear markets, you would definitely get rich. Accepting volatility is the price you pay for obtaining excellent returns.

We always emphasise that equities need to be held for multi-decades and even multi-generations. Considering that one has a career span of 3 decades and post retirement life of another 2 or 3 decades; we need to learn to hold equities for many decades. Since a part of our wealth goes to next generation, we also need to learn to hold it for multi-generations. Great wealth is made only this way.

If you can change your mindset towards equity and be a ‘buy & hold’ investor, financial independence and significant wealth is definitely yours.

I keep sharing data and real life examples to reinforce the need to hold equities for long run without timing the market.

I was reading this article.

Russ Gremel of Chicago is 98 years old. Due to his love for nature, he is donating $2 million to establish a 400 acre wild life refuge, which is also being named after him.

Seventy years ago, when he was in his twenties, he saw Chicago based Walgreens, apharmacy chain, growing well. He invested $1000 in the stock of Walgreens. He held it through bull and bear markets, recessions and booms, good and bad news and various business cycles. He was just monitoring the company, without selling a single share. Though it is not mentioned, he might have received excellent dividends over all these years. No one in his neighbourhood was aware that he is a rich man.

Now that $1000 has become $2 million. Power of buying right and sitting tight.

Whether it is stocks or equity funds, staying the course for long run is the way to create huge wealth even with relatively modest investments. Churning should be very minimal. Chasing performance and timing the market invariably brings only wealth destruction.

Our biggest value addition as an advisor is making you stay the course. Example such as Russ Gremel is to provide you positive reinforcement.

Wishing you a great week ahead.

Posted in Stock Market, Wealth | 3 Comments »

Don’t fear

Posted by Muthu on April 25, 2017

The title of this piece should have normally come during corrections or bear markets.

Why I’m saying this when the indices are rising?

This is for those of us who may fear when market makes new highs.

First understand that 29,000 or 30,000 is only a mere number to measure the journey of Sensex.  Thirty eight years ago, it started at 100 and has multiplied 300 times over 4 decades.

At 100 or 1000, investors then would have had difficulty in imagining a level of 30,000. Now we may find 100,000 unimaginable. Sensex would touch this and much more in the course of its journey.  None of us know when.

All we know is that it would continue to keep going up in line with earnings with occasional corrections and gut wrenching bear markets.

To quote Nick Murray, declines are temporary and uptrend is permanent.

From the time it started, Sensex has made innumerable ‘new highs’ and ‘all time highs’. So there is no need to fear these terms. These are very common words in markets, more so in bull markets.

Also no need to keep anchoring to Sensex levels. There are broader markets, small cap, mid cap, sectoral indices and so on.

Sensex might have delivered hardly around 4% to 5% during last 10 years. But so many good mutual funds have delivered double digit returns. Many of you who are our clients for last 9 or 10 years can vouch for this. The return we get is based on the results of the companies we own, either directly or through mutual funds. Sensex return has nothing to do with the same. Sensex is still at the same level it was around 2 years ago. But your portfolio has delivered decent returns during the same period.

So stop anchoring to Sensex. It is only a very broad indicator. Many a times it has got nothing to do with your portfolio performance. So as much as you ignore bear markets, learn to ignore bull markets as well.

I’ve no ability to time the market. I don’t believe anyone else has the ability though many claim so. To me, you may buy when you have money and you may sell when you need money; at least holding for a period of 10 years in between. A bull or bear market can last for many years. There is no timeline for the same. Even in a long term bull market, it would be a roller coaster ride. Bear markets can happen suddenly as it happened early last year, only to be followed by a bull market subsequently.

Visualise a continuous uptrend in line with earnings over a long period of time (10 years+), with many rise and fall in between. This is the nature of journey and this is how wealth is made.

You’ve often heard me asking you not to fear bear markets.

The same holds good for bull markets as well.

Don’t  fear.

Posted in Stock Market, Wealth | Leave a Comment »

Treat it the same way

Posted by Muthu on April 14, 2017

Wishing you and your family a very happy Tamil New Year.

We are generally good at holding on to assets. The house we own might have been bought by our father and our daughter may continue to own it. It is not uncommon for gold being passed on to many generations in a family. Despite being low return assets, we have positive experience with house and gold because we rarely make loss in the same.

The reason for not making loss is because we hold them long; from decades to generations. Volatility and corrections get smoothened over such long stretches resulting in secular uptrend. I know many who bought home 5 or 7 years ago and there has been no appreciation. They are fine with it. Gold’s price is lesser than what it was some years ago and people are ok with the same. Culturally we’ve a natural inclination to hold on to those assets. That’s a big blessing resulting in positive experience from these asset classes.

Other than a small number of families, who are exposed to equity in early age and taught about its nature or first generation investors who are able to get this understanding, most investors find it difficult to hold on to equities. Unlike real estate, equity is extremely transparent and liquid. A price quote is available every day. You find both buyers and sellers also every other day. This coupled with every day volatility and periodic corrections make people not to hold on to this high return asset.

Advisors like us help you to understand equity. The key understanding is that in short run the prices move due to sentiment and liquidity and in the long run, prices move only due to earnings. Companies and portfolio which continue to keep growing earnings will only move in one direction, which is upwards, in the long run. There are many stocks, why stocks even mutual funds, which have grown by 40 times to 100 times in last 20 years.

We believe at 15% expected returns, we can hope to multiply capital by 4 times in next 10 years and 16 times in 20 years. This would be possible if you treat equity in the same way as you treat house and gold; holding it for decades and for generations.

If you can apply your learning from house and gold to equity, it would give returns much higher than what these conventional assets have given. World over, equity is considered as the highest compounding asset class. All it is needed to get it’s benefits is to apply your learning and start treating it in the same way as you treat other assets.

Fair and equal treatment is a very legitimate demand.

Grant it and grow rich.

Posted in Stock Market, Wealth | 3 Comments »

We are our enemy

Posted by Muthu on April 9, 2017

The average holding period of a stock is around 10 months and that of mutual fund is around 18 months. We’ve been repeatedly highlighting this.

SEBI recently conducted a survey among investors. The results to me are not surprising. 38% of people hold mutual funds for less than 6 months. 19% hold only for a period of one year or less. 21% hold it between one to three years. Only 22% hold beyond 3 years.

There is no further drilling down. I believe that investors holding for more than 5 years may be less than 10% and those holding more than 7 or 10 years would be 2% or so.

The above data clearly indicates 57% of investors do not even hold mutual funds for a year.

In one of our piece we saw how S&P 500 has earned 10.4% over last 30 years while an average investor has earned only 3.7%.

The main reason for this is chasing performance and having a less holding period.

Even for a conservative debt oriented product like MIP, we suggest a minimum holding period of 5 years.

We don’t offer equity if the client is not willing to commit a holding period of 10 years.

Once good investments are chosen, what matters is holding period.

I’ve also mentioned why generally the holding period is less. I would like to repeat the same below:

We’ve written many times in the past how investor earns much lesser than what the investment provides by jumping the ship in bad times, not staying the course, chasing performance, frequently churning the portfolio, redeeming during corrections, stopping SIPs, chasing current fad or fashion ignoring long term consistency across market cycles, timing the market, not understanding the power of time and compounding, inability to develop long term perspective and so on. The list of behavioural errors investors make is indeed very long.

Many advisors, especially the institutional ones like banks, try to showcase their value by doing lot of activities on clients’ portfolio. This is the way to justify their role and earnings. But this only adds to client earning sub optimal returns. They are afraid to offer inactivity as value proposition.

For the last 11 years, we’ve chosen the tough path of adding value by doing less activity on your portfolio. Since investors generally equate activity with progress, it has not been an easy journey for us. Instead we chose to continuously focus on your behaviour which is what matters once a course is set.

I’m glad that those of you who are staying with us for long are earning good returns. I’m also grateful that you’ve understood our value proposition by continuing to stick with us by sharing our investment philosophy.

Remember if any one of us fail in investments in future, it would be due to our behaviour rather mis-behaviour. We are our own enemy when it comes to investments.

Let us avoid mis-behaviour and behave well, as always.

Posted in General, Wealth | 3 Comments »