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Should one consider investing in innovative SIPs?


Since the equity market is climbing a new high every other day, would you suggest investing through Smart SIP? – Anonymous


Smart SIPs are an innovative offshoot of a regular SIP.


They are smart because the amount of money that gets invested in equity each month depends on how the markets are faring.


They have an algorithm that decides whether the markets are expensive or cheap based on specific parameters. So, if the algorithm believes the market to be richly valued, only a part of your SIP amount is invested in equity. The rest of it is diverted to a liquid fund, which is a type of debt fund. And if company stocks are trading at a discounted price, more money is invested in equity and less in a liquid fund.


That is broadly how smart SIPs work.


In theory, it looks like a winning strategy. You invest less in equity when they are expensive and seek refuge in a debt fund, and vice versa. But in practice, there is an element of timing the market, which no-one can perfect on a consistent basis.


The power of simplicity


In fact, the plain-old SIP is actually a solution to the problem of timing the market. In this case, you keep investing in the market regardless of whether it is expensive or undervalued. While this may read like a high-risk option, SIPs benefit from rupee-cost averaging.


For the layperson, rupee-cost averaging means that you buy more mutual fund units when stock prices go down and fewer units when prices are high. So, this simple yet effective strategy negates the risk and stress of second-guessing and timing the market. Additionally, it helps you to be disciplined with your investments, a key ingredient to building wealth in the long run.


To summarise, we suggest you stick with regular SIPs and keep it simple.


Source- Valueresearchonline

This wealth manager says even risk-takers must invest in debt funds. Here’s why


Known for his insightful investment nuggets on X (formerly Twitter), Kirtan Shah commands a substantial fan following on social media. As managing director of private wealth at Credence Family Office, which manages over Rs 10,000 crore in assets, he is associated with the wealth industry. But that’s not all.


As part of the education and training industry, he heads two ventures, FPA Edutech, a training provider of international certification programmes, and Ambition Learning Solutions, a leading player in the BFSI training industry, both of which he co-founded several years ago.


Shah, spoke to Moneycontrol’s Maulik M about how to design a simple portfolio and the importance of staying invested for the long term.


When the equity market is at a high, many investors say they want to wait to invest. What would you say to them?


This is a well-known fact and there are enough data studies to show that every time you invested at a market peak but stayed on for a longer time, your experience would have been the same had you invested at any other time.


Very specifically, if you’re a sophisticated investor, and you understand valuations are expensive, or you understand there is a strong resistance (technicals), and you want to wait, that’s a call you can take. But 99.9 percent of retail investors don’t really have the capability to judge this. If you are confident in the India story, and believe in at least 6-8 percent GDP growth roughly, plus a 4-6 percent inflation, I don’t see a reason why markets will not deliver about 12 percent CAGR (compound annual growth rate).


As a retail investor, you have only two things in your control. First, how much you save, and second, how long you stay invested. You can’t predict the return you will make or what (large-, mid- or small-cap, or value or growth style) will work in the markets in the next few years.


So play to your strengths, invest as much as you can and remain invested for as long as you can.


If someone has Rs 10 lakh today, where should they invest it?


First determine your risk profile and then, design an asset allocation strategy. So if you’re an aggressive investor, you would want more money in equities, if you’re conservative, you would want less. But both investors will still need other assets, too.


For example, if you are an aggressive investor, I would still suggest that you have 20 percent in fixed income and gold depending on what you read about the macros.


I am always asked why an aggressive investor must also have fixed-income investments. Even if I don’t talk about how that reduces risk without hampering returns, I would say, when the market falls, say, by 20 percent, most of us don’t have any additional money to invest. At such times, you can use this fixed income portion to buy markets at lower levels.


More specifically, I have a very simple formula.

  • In equity, you don’t need more than four or five schemes, irrespective of your investment amount, whether Rs 10 lakh or Rs 10 crore.


  • Split this equally between large-cap, mid-cap and small-cap funds, because you don’t know what will work in the next few years.


  • Make sure that your investment horizon is at least 8-10 years.


  • Also make sure that you have a good balance between fund houses that follow the value style and those that follow the growth style of investing.


  • Then, some part of your portfolio will definitely be performing irrespective of the cycle that you are in.


  • For fixed income (for an aggressive investor), you can put money in a medium-duration fund and a credit risk fund. Currently, we feel interest rates have topped out and that medium- and long-duration debt funds will do well for the next few months. But when rates are low (24 months from now), credit funds will start doing well. So that gives balance to your fixed income portfolio.


In equity, why not simply go for flexi-cap funds, instead of a mix of large-, mid- and small-cap funds?



In India, typically flexi-cap funds work like large-cap funds. On the other hand, when you invest around 33 percent each in a large-cap fund, mid-cap fund and small-cap fund, then the risk of this strategy is as good as a large cap fund (based on standard deviation) and your returns are as good as for mid-cap funds. On a risk-adjusted basis, it’s better than investing in flexi-cap funds, with your eyes shut. There are hardly two or three flexi-cap funds that are genuinely flexi-cap.


What do you think of gold as an investment? And what about investing in it today?


For me, gold is a tactical bet. I hear a lot of us saying that we should have gold. But what is going to significantly change in your portfolio with a 5-10 percent allocation to gold? Nothing.


If you look at the last 12 years, gold’s dollar return has been 0 percent, and the rupee return has been 3.5 percent, and that’s only because the rupee has depreciated. So, what problem is gold really solving in your portfolio? To me, it is an extremely tactical bet.


Is that bet going to work, today? I think, yes.


Gold works very differently in terms of dollars and in terms of rupee. First, gold in dollar terms—whenever the dollar depreciates, gold will go up because then people buy more gold. Are we expecting the dollar to devalue? The answer is yes, because we think interest rates globally have topped out and when rates start falling, you will see the dollar depreciate. So in terms of dollar denomination, we think gold will do well.


But I’m not sure how well it will do in rupee terms. India is expected to be a far stronger emerging market (EM) currency versus others in the EM space. So if the dollar were to depreciate, the rupee would go up. This will be counterproductive for gold returns in rupee terms.


So your bet depends on both these factors, and they are both at pivoting points right now. So a retail investor should not take this bet.


Do debt funds still make sense after the loss of indexation benefits in 2023?


As a retail investor, I have multiple other options. I can go for corporate deposits and fixed deposits in small finance banks. Now, we can argue that interest rates are going to fall and so long-duration funds will do very well (give capital gains). But that is not written anywhere. So these funds are not meant for retail investors.


But for a sophisticated investor, I think long-duration funds are still the most appropriate option, provided you understand the interest rate cycles. Making around 8-8.5 percent is no problem at all if you can give it two to three years and understand the cycles. Debt funds give many advantages to a sophisticated investor—ease of liquidity, multiple categories to choose from depending on risk capacity, and scope for diversification. So, such investors should still stick to debt mutual funds.


What are some of the biggest investment mistakes to avoid?


  • Looking at the last three years’ returns and investing in the market.


  • Investing based on some data points given on media or social media.


  • Diversification does not mean having 20 funds. Many investors keep adding newer funds in the name of diversification.


  • Lack of discipline. Most equity fund SIPs (systematic investment plans) close in two years’ time.


Source- Moneycontrol


Investing needs time and attention


Some five years ago, I wrote a column on an American startup called ‘Long-Term Stock Exchange’. Before I tell you anything more, I’d like to point out that the venture has, for all practical purposes, failed. However, the idea was genuinely interesting. An entrepreneur named Eric Riese decided to find a way to cure short-termism amongst equity investors, so he came up with the idea that people would invest for the long-term if their holdings in a stock automatically increased as time went by.


Of course, the holding can’t grow so he modified the concept and decided that the voting rights for each share should go up. He decided to set up a stock exchange where this kind of automatic adjustment would happen to companies that were listed on it. This sounds like a weird concept, and it is. But America is a weird country, so not only did he get venture funding for this exchange (from no less than Marc Andreesen) but also got permission from the regulator, SEC, to set up this exchange. Needless to say, nothing much came of this startup exchange. Still, it’s better to have tried something fundamentally innovative which tackles a difficult problem and then fail, rather than failing at yet another copycat startup as so many others do.


The underlying problem is perhaps the most serious one in equity investing. Many, perhaps most investors have an unbelievably short-term perspective. They have a definition of long-term which is ludicrously short. If you listen to social media discussions on the issue, you will find that opinions are divided, ranging from a high of seven months to a year down to anything that is not day trading. Even the government’s official definition is just one year!


Some years ago, Fidelity Investments conducted a study in the US to find out what kind of investor accounts had the best returns. It was observed that the greatest returns came from investors who had neglected their investments for several years, or even decades. Interestingly, many of these investors had passed away a long while back – the ultimate in do-nothing long-term investing. Even though one cannot recommend this as a strategy, it’s nonetheless an interesting finding.


In recent times, I have felt that one of the root causes of investors not venturing into long-period investments was simply not wanting to do the work in understanding a business. When you invest for the typical few days to weeks, you just need to have a view of the stock movement, it’s enough to just have a view on the stock price – there is no need to know anything about the company itself. However, if you do invest for a year or years then you have to have a view on the company, the sector, the underlying business, the management – in fact, everything about the business itself.


There are two problems with this. One, investors do not have the time. And two, in this age of sentence-length media and social media, they do not have an attention span. This sounds like the same problem but it isn’t. It can take days to understand the basics of a business and even when they have the time, I find that the patience required to understand a company is simply not there. Most of the investing world is complex and if anyone gets used to the information style of Twitter or Instagram, then understanding complex things becomes almost impossible.


For investors who want to invest in a long-term, fundamentally driven way but cannot spare the time, it’s best to outsource the attention and the research to a mutual fund, or a stock advisory platform like dvmint.com. If that’s all you want, it’s fine. If you want to use these as a stepping stone to do more yourself, then that’s even better.



Source- Valueresearchonline

Investments and goals: Why you need the guidance of a financial adviser

There is a lot of narrative around how managing your own money is quite simple, but that’s not the case really. Financial planning is not only investment planning. It includes liability management, risk management, goal-based planning, estate planning, tax planning, etc. How many of us can confidently say that they have adequate life insurance and health cover? Most would be under-insured and worst; not insured at all.
How do you know if you have selected the right investment management product? You won’t know till you actually face adversity; till then, the cheaper plan will look good. Does the family know how to settle any obligations or property claims after your death? While the number of insured in India is just 5%, only 0.5% in the country actually has a will.
Most of India is under-invested because they have no idea of how much should they invest for their goals. In the rush to generate better returns, people make investing mistakes and can’t achieve simple possible goals.

The investing puzzle


How many of us understand the right asset allocation to have in accordance with our risk profiles, time to the goal, liquidity needs and return expectations?
India has more than 1,500 mutual fund schemes, over 400 portfolio management services (PMS) providers, 200-plus alternative investment funds (AIFs), more than 500 non-convertible debentures (NCDs) and bonds, over 100 fixed deposit options and thousands of other investment products. How does one decide which ones to invest in and which ones to avoid?

The problem does not stop at deciding the right asset class or product category, but also zeroing in on specific funds, asset management companies and fund managers.
For example, in the last three years, the worst-performing small cap fund gave 27.5% annualized return, but the best gave 47.7% annualized returns. The difference is of a staggering 20 percentage points. So, you can see anywhere between 27.5% and 47.7% returns, depending on your ability to pick the right fund.
Forget about the 20-percentage-point difference, even if the difference is three percentage points, the outcome is hugely different. For example, 50,000 monthly SIP (systematic investment plan in mutual funds) for 25 years, at 12% annualized returns, will become 8.5 crore. The same 50,000 SIP for 25 years at 15% will become 13.7 crore, a difference of a whopping 5.2 crore.

You will now say, okay I will invest in Index! That still does not solve your problem, unless you can get the right asset allocation. There are hundreds of index and exchange traded funds (ETFs). Most don’t even know that ETFs are mutual funds, that’s unfortunately the level of financial literacy among Indian investors today.

Behavioural issues


Let’s say you know it all, but remember wealth management is less of investment management and more of behavioural management.Will you hold your investments for 25 years? I keep hearing stories around how had I bought 10,000 of this stock, it would be worth 100 crore now, but how many of us have really held on for so long?

Investing is not as simple as it looks.

Managing risks


Risk management is a crucial element of financial planning that most investors tend to ignore. Having adequate life insurance cover can ensure that your family’s needs and goals are taken care after your death. An adequate health cover can ensure that you don’t have to take a significant hit on your savings and investments in case of a medical emergency.

These risk-mitigating instruments are what can set the foundations of your entire financial journey. However, you need a financial adviser to tell you how much insurance cover you need to take care of your family’s current and future goals. Also, what health cover you need to ensure that your medical costs are covered even after accounting for medical inflation.
So, you often need a friend, philosopher and a guide to help you through the journey. Here is where a Sebi-registered investment adviser and a competent financial planner can play an important role in your investment journey.
Source- Livemint

Wealth creation is not a magic, make sure it happens by method


As we celebrate the World Financial Planning Day on 4th October this year, let’s chat about something we all know but often overlook—financial planning. Financial planning isn’t just for the elite or the well-versed as often misunderstood, it’s for every Indian who aspires to secure their future.


Why Financial Planning Is a Big Deal


Picture this: You decide to go on a road trip without any idea of your destination, no map, no GPS. Fun at first, but you’ll soon find yourself lost, frustrated, and maybe even running low on fuel or battery as applies to you. That’s what life can feel like without financial planning. Here’s why financial planning is a must-do.


1. Your Goals Are Your Roadmap: Just like you’d set a destination for your trip, financial planning helps you set and prioritise life goals. Whether it’s buying that dream home, sending your kids to college, or retiring comfortably, a plan gets you there better and generally with less stress.


2. Unexpected Potholes: Life’s full of surprises—some good, some not so much. A well-thought-out financial plan is like having a spare tyre for those unexpected flat tyres in life.


3. Money Multiplier: You know how your smartphone battery drains when you use too many apps? Well, your money does the same if you don’t manage it wisely. Financial planning helps you keep your money working for you, not against you.


4. Zen Mode: Imagine having adequate money set aside for emergencies and life’s little luxuries. Financial security brings peace of mind, and that’s worth its weight in gold.


Financial Planning in India – The Reality Check


So where does the Indian scenario stack up on all this? We’ve got a lot going for us, but we’ve still got some ground to cover when it comes to financial planning.


1. Financial Literacy Gaps: Many of us never learned the ABCs of finance. It’s like trying to play cricket without knowing the rules. We need better financial education, starting from schools to workplaces.


2. Insurance Missteps: A lot of us are underinsured or don’t have insurance at all. It’s like riding a racing bike without a helmet. Comprehensive insurance should be a no-brainer.


3. Stashing Cash: We’re known for saving, but sometimes we just hoard cash or park it in low-yield investments. Imagine having a supercar and only driving it at 20 km/hr. It’s time to rev things up and explore better investment options.


4. Retirement Myopia: Retirement planning is still a new concept for many. It’s like ignoring the scoreboard in a cricket match and hoping to win. Start planning for retirement early; your future self will thank you.


Benefits of Getting Your Financial Act Together

Now let’s talk about the good stuff—how getting your financial ducks in a row can make your life better.


1. Freedom to Dream: Ever dreamed of quitting your job to travel the world or start your own business? Well, financial planning can make those dreams a reality.


2. Stress Buster: Financial worries can give you sleepless nights. But with a solid financial plan, you can relax, knowing you’re prepared for life’s curveballs.


3. Money Magic: Smart planning can make your money grow faster than a magic beanstalk. It’s not about making more money; it’s about making the most of what you have.


4. Legacy Building: Wouldn’t it be amazing to leave a legacy for your kids and maybe grandkids? Financial planning helps ensure your wealth sticks around for generations to come.



World Financial Planning Day: What’s the Big Deal?

Now, why should you care about World Financial Planning Day? Here’s the lowdown:


1. Wake-Up Call: It’s a reminder that financial planning isn’t just for the rich and famous; it’s for all of us. Time to roll up our sleeves and take control of our financial future.


2. Community Vibes: This day brings together financial experts, everyday folks like you and me, and everyone in between. It’s like a big financial planning picnic, where we share tips and stories.


3. Think Global: Money matters are universal. On this day, we realise that the same rules apply whether you’re in India, the US, Europe or anywhere else. Financial planning is a worldwide team effort.


4. Be Empowered: World Financial Planning Day is your chance to get the scoop on how to make smart financial moves. It’s like having a personal financial coach on speed dial.


So, as we celebrate World Financial Planning Day, remember this: Financial planning isn’t rocket science; it’s life science. It’s about making your life easier, more enjoyable, and full of possibilities.


Take a step today, set some goals, protect your dreams, invest smartly, and plan for your golden years. It’s your journey, and with a little financial planning, it’s bound to be a lot smoother and more rewarding. Here’s to your brighter financial future!


Cheers to World Financial Planning Day!


Source- Economictimes

Real volatility, false risk


Nowadays, tomato prices are volatile, but the stock market is not. At least, that’s what the headlines say. Are they correct? What is the meaning of the word volatility? The word appears to have three related but distinct meanings. Unfortunately, the one that is most commonly used is the wrong one.


Outside the financial markets, volatility means, as a dictionary puts it, undergoing frequent, rapid, and significant change. For example, the weather can be volatile. In the financial markets, technically, it means the amount of variation in a series of traded prices of anything over time. You can get even more technical and talk about the dispersion of returns for a security or an index. High volatility means that the price may change dramatically over a short time period in either direction. Low volatility means that it will not fluctuate dramatically but change at a steadier pace. Note that there is no direction of movement implied in either of these definitions, either the financial or the non-financial ones.


The third definition of volatility is the common and wrong one: Volatility means that the price of something is moving in a bad direction. In the media and social media, volatility means that bad things are happening to the price of something. It’s a ridiculous definition, but it’s the most common one. Technically, when the price of a stock increases sharply, it increases the volatility. However, I doubt whether anyone has ever used the word volatility to describe a sharp increase in a stock price. The word is only used for bad things. Funnily enough, in some contexts, that can mean a price rise. In the current tomato headlines, volatility means a rise in prices!


But let’s talk about genuine volatility. A lot of savers will always choose the lowest possible volatility in the asset class they choose for their savings. The massive preference for fixed-income assets like bank FDs, PPF, and other sovereign deposits that we see are all strong evidence of this. Even within market-linked volatile asset classes, lower volatility is a characteristic many investors chase. Within equity mutual funds, people will choose hybrid funds or only conservative large-cap funds and so on. All this is fine–I’m not criticising this. In fact, I keep a tight check on the volatility of most of my investments.


However, and this is something that few investors appreciate, lower volatility is not free. It has a cost. Perhaps that sounds self-contradictory to you. After all, we have been conditioned to believe that volatility means losses and lower volatility is good. That’s not true. Choosing the right kind of volatility can always boost your returns. To see the truth of that statement, compare equity mutual funds with bank fixed deposits. When you choose lower volatility, you reduce your returns. You are paying the price for stability — volatility in good quality investments means that your investment fluctuates but, on the whole, rises faster.


However, do you actually need the lower volatility? That question is important because volatility is transient. For a quality investment, prices fall but then rise again. The fall in value means that it will soon rise even faster. For investments that have to be held for a long time, paying the price for lower volatility makes little sense. If you can withstand temporary volatility, you should happily and enthusiastically embrace volatility — that’s the road to high returns.


Many years ago, Warren Buffett said, “Charlie and I would much rather earn a lumpy 15 per cent over time than a smooth 12 per cent.” So should you and I. One doesn’t have to be as rich as Buffett and Munger to prefer a lumpy but higher return. One just has to be as sensible and have a long-term view.


Source- Valueresearchonline

Investing for women


The world is changing. So is India.


We’re in an era of growth. And never before in the history of finance and economics have women been more instrumental. While women are increasingly taking charge of their finances, they are still far behind where they can be.


So, let’s see how our women can invest and grow their money better.


Myths around women and money


One of the common reasons why many women shy away from investing is the number of myths surrounding women and finance.


The biggest of them is that women do not understand finance or do not have the mathematical abilities needed to make the right decisions. Another myth is that women are not good at managing money and they are risk-averse.


On top of everything else, the belief that women love to splurge is one thing that makes many people believe that women do not make good investors.


What’s the truth


A lot of these myths, in reality, are simple gender biases. One doesn’t need a lot of background in Maths and Statistics to make wise financial decisions.


Although there is no research available in India, some reports from the developed economies suggest that women end up spending more on essential family needs like food, clothing, medical expenses etc. This leads to lower surplus investable income with them, hence the myth that they spend more.


And yet, despite the conservative household budgets, our women, through generations, have been managing to save money. All that needs to change for women to generate wealth is to put this money in suitable instruments.


Financial decisions are not rocket science. Common sense is as instrumental to finance as any other decision-making process, and women have it in plenty and then some. As far as the more technical aspects of investing are concerned, there’s always expert advice available, just like it is for men.


How is the scenario changing


For women to be in charge of their wealth, the game has to change on multiple levels. Change has already begun and is visible to an extent.


For instance, at the national level, India’s recent economic growth has been nothing short of a perfect winning-against-all-odds script. Organisations like the IMF and the World Bank are raving about India’s resilience even in the currently chaotic world.

This means more opportunities for women to invest.



On the other hand, the push behind women’s entrepreneurship, STEM education, diversity and inclusion at workplaces, and women’s safety, has enabled them to earn more.



The latest AMFI data indicates that the number of women between 18 and 24 who invest in mutual funds has grown more than four times (62 per cent annualised growth) from December 2019 to December 2022.


Similarly, the number of women investors in the 25-35 age bracket has doubled (grew at 33 per cent) over a similar period. In contrast, the older age groups have grown relatively slowly, at 11 per cent annualised growth.



How to start your investment journey


If you still haven’t started investing, our first advice is to begin. There is no better time to invest than now. So, just start.


Also, do not hesitate to seek expert advice or professional support when choosing the right investment instruments, specially in the early stages of your journey.


Remember, the basic principles of investing and the larger economic framework of the country remain the same for men and women. So, any piece of advice on investment remains as valid for your investment journey as it is for your male counterparts.


However, here are some simple steps summarised to start your journey.


  • Start investing with discipline. You can start an SIP with as less as Rs 500, and do your KYC and payments online.


  • Stay regular. Don’t lose tempo, get bored, or forget to keep investing.


  • The next step in investment is to plan your goals. Your goals can be either short-term or long-term. For instance, retirement is a long-term goal, while buying a car can be a short-term goal. In a long-term horizon, you invest regularly for five years or more. A short-term investment horizon is one to three years.


  • Choose the right fund. This critical step may look complicated, but this is no rocket science.


  • debt fund is a good choice if you’re investing for a short-term goal. For any long-term goal, an equity fund is the best option. It balances your risk and returns well.


  • If you’re a first-time investor in an equity fund, you will initially benefit from an aggressive-hybrid fund. It reduces your risk and lets you witness the value of systematic investing over two to three years.


  • Once you get a hang of the market, you can quickly move to pure equity funds, say a flexi-cap fund, for good returns.


  • Increase your SIP gradually. If you’re a working woman, keep increasing your SIP as your earnings increase. If you’re a homemaker, you can still invest an extra amount whenever you get cash gifts, inheritance etc.


  • Remember, your key to success is the consistency of investment so that you can create an emergency corpus or a nest egg for your old age.


The message is simple.


The fundamentals are not gendered. So, your journey doesn’t have to be stereotyped, either. Women can manage finances; they do manage finance. And successfully so.


The other key principle to note is that there’s saving, and there’s investment. And, if you want to grow your wealth, you must begin investing now.


India is on the cusp of something great. The next 25 years are expected to make the country reap the magical benefits of the last 75 years of effort. And there’s no reason why women should not benefit from this golden period!


Source- Valueresearchonline

Fake patterns in investing


Several decades back, a particular incident sparked Daniel Kahneman’s journey toward ground-breaking discoveries, ultimately leading to the birth of behavioural economics as a widely accepted field. Despite being a psychologist, Kahneman was honoured with a Nobel Prize in Economics for his pioneering contributions. However, for us investors, this story sheds light on how we can be misled into believing we are correct, even when we’re off the mark.


In the 1960s, Kahneman was a junior psychology professor at the Hebrew University of Jerusalem while having a part-time assignment of giving psychology lectures to the Israeli Air Force flight instructors. One of his recommendations was to advise instructors to praise trainee pilots for their achievements but to abstain from criticism when they erred. This approach was rooted in his psychological education and understanding.


However, the flight instructors argued that their real-life experiences taught a different lesson. They had seen that trainees often underperformed after receiving praise and improved after being reprimanded. Although Kahneman was confident in his ideas, he didn’t outright dismiss the instructors’ assertions, given their substantial real-world experience. He kept thinking it over. And then, he had the insight that set him on the path to behavioural economics.


Kahneman realised that good performance after a scolding was not a result of the scolding itself. Each pilot had a certain skill level, which gradually improved with training. Naturally, each trainee had some good days and some bad ones. These were distributed around an average that represented that trainee’s skill level. A good day in the aircraft had a higher likelihood of being followed by a bad day, and vice versa. However, because the instructors followed each day with either praise or criticism, it looked as if the feedback had a contrary impact. An almost random set of events created a powerful impression of cause and effect, which was utterly believable.


Isn’t it obvious how this has a great similarity to how we all make decisions about investments and how we come to conclusions about the impact of our decisions? The brain is an extremely powerful and persistent pattern-recognition system, to the extent that it will create believable patterns where none exist. After a few years of investing, whether in equities or equity mutual funds, all of our brains are likely to be as clouded with false conclusions and misleading rules of thumb as those flight instructors. The worst part is that, exactly like the flight instructors, we all have ‘evidence’ that our rules work. When we make bad investments, we explain them away by making more spurious connections that are, in effect, even more rules. Curiously, I find many more people who have made these little rules about timing the markets rather than identifying good investments. Everyone seems to have these signals they follow about when to buy stocks, when not to buy, and when and how to sell. Sometimes, purely due to chance, the rules appear to work, reinforcing our beliefs.


The way I have described this phenomenon, there is no solution. However, there is, and a very simple one. One word: automate. I don’t mean in the technology sense but in the sense of rule-based investing. A perfect example is investing through a SIP in an equity mutual fund.


That subjects you to an automated, rule-based system that is not amenable to the ad hoc timing you may be tempted by. For equity investing, do the equivalent. For stocks on your buy list, keep putting in a fixed amount of money at a regular period. That’s exactly the strategy we recommend in our Value Research Stock Advisor service.


Remember, the pattern recognition that serves you so well in many other aspects of life can be your biggest enemy as an investor.


Source- valueresearchonline

High returns or Appropriate returns?

Morningstar’s vice president of research, John Rekenthaler, on Bill Bernstein’s newly released second edition of his 2002 classic, The Four Pillars of Investing.


The book covers a wide range of territory: investment theory and history, financial advisory practices, portfolio construction, and investor psychology.


When Bernstein wrote the first edition of Four Pillars, as a relative newcomer to the field, he was enthralled by the numbers. Investment research is bounded by science. In contrast with many of his quantitatively minded peers, though, he recognized from the start that investment math could also be a trap. History never repeats exactly—sometimes not even approximately.


For that reason, he addressed investor psychology.


Twenty years later, he has expanded on that message. The second edition opens by contrasting two investors:


1) Hedge fund Long-Term Capital Management, run by two Nobel Laureates

2) Sylvia Bloom, a legal secretary who died at the age of 98, holding $9.2 million in assets


The former belied its name by surviving only four years, while the latter persisted for 67 years, with great success. Writes Bernstein, “Unlike the geniuses at LTCM, [Bloom] wasn’t trying to get rich quick, but rather to get rich slow—a much safer bet.” That sentence neatly summarizes Bernstein’s counsel.


Speculators pursue high returns; investors seek appropriate returns.


Four Pillars spends little time on the obvious forms of speculation, such as buying meme stocks or trading options. No need to beat that horse; the book’s readers either already realize the futility of tail-chasing, or they bought the book because they are ready to absorb that lesson.


Four Pillars instead addresses the type of errors that educated investors might unknowingly make—and that Bloom did not. They include:


1) becoming seduced by investment narratives, as made by intriguing but ultimately mediocre theme funds

2) succumbing to recency bias

3) believing too strongly in one’s own abilities, thereby discounting the wisdom of the crowd (Is the marketplace crazy? Perhaps. But that occurs far less often than most investors believe.)


The most dangerous delusion comes not from how investors perceive the outside world, but instead from how they view themselves.


The first edition of Four Pillars included a risk-tolerance table, to help readers establish their equity allocation. For example, investing 80% of one’s assets in stocks might lead to a 35% portfolio decline, under unusually bad (although not the worst possible) circumstances, while owning 40% would cut the loss to 15%.


Writes Bernstein in the second edition:


I neglected to ask whether readers had actually lost 15%, 25%, or 35% of their portfolio. Simply looking at this table or running a portfolio simulation on a spreadsheet is not the same as facing real-world losses. The stock market only rarely falls for no good reason – bear markets are almost always the result of incipient financial system collapse, hyperinflation, or the prospect of nuclear annihilation. The fear of real geopolitical and economic catastrophe makes such times the most dangerous mountain passes on the highway of riches.


That is, it is not enough to have been in the right place at the right time, as wealthy Americans have been during the past 40 years. Investors must also know how to convert their paper opportunities into tangible dollars, by making sound decisions that withstand the test of time. Underinvesting is an obvious problem, as one can’t pocket stock market gains without stocks. But overinvesting can also be a costly error. Getting rich slowly means finding the appropriate personal level.


That conclusion may seem simple, but enacting it proves surprisingly difficult. Over the years, tens of millions of investors have crashed upon the asset-allocation rock. Such a fate, however, is unlikely to befall those who read Four Pillars. By the time the reader encounters Bernstein’s homily on risk perception, the book already established 200 pages of context, with another 100 yet to follow. The advice is therefore not hollow. It echoes.


Source- Morningstar

Navigating finances for new couples


New couples have a choice to make. They can choose to open up about their finances or not. Those who are successful will watch their nest eggs grow and progress towards shared goals.


Success simply starts with an open dialogue. When it’s missing, arguments are inevitable.


“While fighting about money is not necessarily common, those arguments tend to be longer than other arguments, and more damaging to the relationship than other types of arguments,” explained Sarah Newcomb, when she was Morningstar’s Director of Behavioural Science. Hence, it is very important for couples to find ways to communicate in a healthy way about finances.


You will be surprised to know that money is the top reason for stress among adults. This is regardless of the economic climate.


If money is the number one reason for stress in people’s lives, we need to talk about it. Talking helps reduce stress. Unfortunately, not many do so.


People who feel that they are moving towards a committed relationship need to start a dialogue about finances. When you go out with the person, you get a sense of what their values are around money, family history and debt.


How do you start chatting about money?


The first conversation shouldn’t be about your credit scores or how much you earn or how much debt do you have. Neither should it be about how to merge your finances as a couple.


Newcomb suggests “get-to-know-you” questions that make the person open up. What was money like in your household growing up? What does the good life mean to you? Does money keep you up at night? Do you think of money as a necessary evil or as freedom and opportunity?”


Tell your partner that you are curious and want to learn more about him/her and their family. It is not about judgement, but about developing a deep understanding of who your partner is and what the stories are that are driving the financial decisions that you two will eventually make. Share your experiences too.


You need to talk even if you never combine bank accounts. Learning how to talk about difficult things together is the key to having a solid financial life together.




What debt does your partner have? What is their attitude towards clearing it? If your partner has a huge credit card bill and is least concerned, it is a red flag.


Credit scores are important when you’re contemplating buying a home and taking a loan. So your potential spouse’s credit score may have a significant impact on your financial ability together.


Splitting expenses.


If both are earning, then the conversation must move to sharing expenses and splitting bills.


Splitting expenses comes down to asking each other “what feels fair”, says Newcomb. Let’s say one person makes three times what the other person does, then they might want to split the bill proportionally. That would mean one partner pays 25% and the other pays 75%. Others may just want to split it 50/50.


Be partners, not judges.


At some point, there needs to be an ‘I’ll show you mine and you show me yours’ numbers conversation where you will show one another your debt and your assets. So many of us will combine our lives, and never sit down and have that conversation where you just simply show one another your accounts.


Avoiding the subject is detrimental. The truth will come out and partners’ finances affect each other.


Financial intimacy is what a lot of couples don’t have. It’s a scary intimacy because it requires trust to show someone your situation. Often we are afraid of being judged and what our partner will think of us if they know our financial situation. Some people are afraid to be judged for having too much. Some people are afraid to be judged for having too little. People are afraid to be judged for being disorganized.


Be honest.


It’s important to tell the truth. As a basis for a committed relationship, being dishonest about how you manage money is a shaky foundation for your marriage.


Have the financial planning and financial future conversations before you get married. Talk about the way you will manage money. The goals you want to accomplish as a couple.


After the most difficult conversations take place, it will make what you have stronger. You’re setting yourself up for success because you did the scary, courageous thing.


Decide the path ahead.


Budgets are not sexy. Budgets are not romantic. But that’s the reality. Sit down at the end of each month and go over the expenses and savings.


It is just as important to keep the romance alive as it is to have financial discussions.


Source- Morningstar