Sahayak Gurukul: November 2018

Friday 30 November 2018

Investment Mantras – What not to do in your investment Journey.

Before we started our journey as an IFA (Independent Financial Advisor), it was important to formulate certain basic policies or rules, which were to be sacrosanct and to be followed under all circumstances, the so-called Investment Mantras.

After a lot of study and interaction with investors, we gained insights into the mistakes made by investors in their investment journey and thus decided on the Investment mantras that should be followed – What not to do in your investment journey- for all investors.

1. No Leveraging

One of the schemes, many investors employ to try and get rich quickly is to use Debt to invest, assuming that they can generate better returns than the cost of Debt. Investment is a long-term game. In any downturn, any leverage and margin calls make the investors lose their shirt on the back.

One major lesson investors should learn from Warren Buffet involves leverage.

"When leverage works, it magnifies your gains. Your spouse thinks you're clever, and your neighbors get envious," explained Buffett in his 2010 shareholder letter.

"But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some re-learned in 2008 — any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero.

History tells us that, leverage all too often produces zeroes, even when it is employed by very smart people."

2. Don’t Mix Insurance and Investment

Life insurance is never bought, but always sold. Please make sure you are not being sold a policy but are smartly buying one.

Term plans are pure insurance products, which are the cheapest, and the best way to buy a large insurance cover. However, many people refuse to buy them because they don't get any money from term plans at the end of the term (or maturity in insurance parlance).

Instead, they prefer insurance products with savings or an investment element such as traditional endowment or money-back plan or more sophisticated stock market-linked ULIPS. These products pay back the premium with returns earned from investment at the end of the chosen term.

But, The entire amount you pay to the insurance company is not what is invested. The premium you pay has three components.

a) Expenses (including commissions earned by the agents as well as expenses and distribution costs).

b) Mortality premium

c) Investment amount

And, to top it all, the amount permitted, to be invested in equity may just be around 8 to 10 per cent of the total investment. So one cannot really expect a great return from their insurance product.

Moreover, the money may sound good now but may not be that great when you finally get it. Let's say you are promised Rs 1 crore 20 years down the road. Taking inflation at 8 per cent per annum, that would be worth around Rs 21 lakhs in today's prices.

Typically, an Endowment policy will charge you a higher mortality premium and give you a return of not more than 6% compounded over a typically 20-25 year period.

 Just to illustrate, the details and returns, of a 25-year endowment policy for a 30-year-old, non-smoker, versus a term insurance of the same amount and SIP in a Equity MF for the balance amount, are mentioned below:

3. No short cuts & speculation

The most important strategy in investing is not small cap or large cap or any other cap but long term. The only way to make money is through long term investing and power of compounding. Nothing else works. Please don’t take any short cuts. No tips; Tips are for waiters and serving staff, surely not for investment. Most Tips are with a vested interest and will reach you once the story is over. They don’t have your interest but the “Tipper’s” interest in mind.

4. No Lock In products – Importance of Liquidity

The reasons you invest in Mutual Funds are better post tax returns, professional fund management, diversification, low-ticket size, etc.

For me one of the major reasons as compared to other asset classes is Easy and hassle free Liquidity and the ease of transactions sitting anywhere in the world.

Closed ended or lock in products are generally sold on the premise of higher returns but most products fail to deliver the Alpha to justify the lock in.

Hence, as a rule, we do not recommend products like close ended funds or any such product which compromises with liquidity.

It’s your money and you should have the freedom to decide what to do with it.

The only exception to the rule is ELSS, which comes with a 3-year lock in but gives you the benefit of Sec 80 C deduction and also has the lowest lock in period for any investment under Sec 80 C category.

5. Don’t try to time the market

Investors often spend a lot of their time in trying to identify when the market is very low or high, and try timing the purchase and sale of investments accordingly. They want to time their exit, when the market touches its peak and to time their entry, when the market has touched bottom.

Statistics show that no one can consistently time the market. Instead of that, a better strategy is to stagger your investments through SIP (Systematic Investment Plan), STP (Systematic Transfer Plan) and withdrawals through a SWP (Systematic Withdrawal Plan) and stay invested for the long term.

6. Follow the Hierarchy of needs

As humans, we have a hierarchy of needs, a theory propounded by Abraham Maslow in 1943 wherein he has said a lower level need has to be satisfied before one can move on to a higher level.

Essentially, the needs can be classified into deprivation or deficit, safety and finally growth. Individuals must satisfy lower level deficit needs before progressing on to meet higher-level growth needs.

Similarly while saving / investing, the “hierarchy of needs” has to be kept in mind.

The basic requirement needs to be fulfilled before you move on to your aspirational and legacy goals.

Just to simplify things, financial goal setting needs to follow a hierarchy, as that will not only decide the amount of investment but also the desired asset allocation strategy.

If you haven't put emergency cash in a savings account, then don't buy term insurance. If you don't have term insurance yet, then don't start putting away money for your daughter's college education, not enough planned for your retirement, stop thinking of all the aspirations, and so on.

7. Don’t try & go Direct or without an Advisor

The following questions should help you decide whether you need an advisor:

a) Do you have a fair knowledge of various modes of investments and keep yourself regularly updated?

b) Do you enjoy reading about investments and doing research?

c) Do you have expertise in investments?

d) Do you Make emotional decisions related to money and get influenced by the volatility in various asset classes.

e) Do you have the time to monitor, evaluate them and make periodic changes to your portfolio based on your needs and financial goals?

The most common reason for going without an advisor or going direct is the difference in cost and the impact of that in the long run through compounding.

Numerous studies have shown that an investor generally gets an inferior return when he goes direct. This is mainly because his investment journey is shorter. With no one to guide or hand hold, he reacts to the market volatility and also tries to time the market thereby getting sub optimal returns. A good advisor will generate an alpha, which is normally more than the cost of an advisor.

Follow the investment Mantras for the best results.

Consult your financial advisor and start your investment plan to achieve your goal.

Stay Blessed Forever!

Happy Investing!

Sandeep Sahni

You may contact us at:

91-9888220088, 9814112988

sandeepsahni@sahayakassociates.com, info@sahayakassociates.com

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Sunday 25 November 2018

FIRE – Financial Independence, Retire Early

The FIRE community is a group of individuals who want to retire early, to achieve financial freedom and follow a certain way of life.

The FIRE movement is a lifestyle system, followed largely by millennials, that’s focused on the goal of achieving financial independence and retiring early.

Some also call it a cult.

The FIRE lifestyle has intrigued many, who are more interested in the simplicity of life, and spending time with family, than being over exhausted with work. They aren’t interested in gaining more wealth in order to have more to spend; it’s quite the opposite. They are intent on living their best lives for less. And it starts by rethinking their relationship with money, with an eye to achieving financial independence.

The protagonists of this movement believe that the real luxury is time, and this is the ideology that makes FIRE a way of life. People who follow the FIRE movement are looking to compromise the present to have a more balanced future. It may not be a more comfortable or luxurious choice, but a lifestyle, which will give you more time with your family, friends and yourself, and to follow your non-work related interests, early on in life.

So if this is the kind of life that you are looking for, start saving and have the back up to be happily retired at 40.

The FIRE tsunami originated with the classic,"Your Money or Your Life," by Vicki Robin and Joe Dominguez. The book inspires millennials to change their relationship with money, live deliberately, spend mindfully, eliminate debt, save early and build wealth.

One of the early pioneers of FIRE movement was Mr. Money Moustache, who in real life, goes by the name Peter Adeney and is based at Longmont, Colorado. While Adeney remains an important leader in the FIRE community, the movement has spread beyond him. FIRE devotees are known to gather in multiple forums, camps and retreats, and, of course, they write blogs.

There is also a growing FIRE subreddit called /r/financialindependence that now has close to 5,00,000 subscribers. There, followers discuss strategies, techniques and lifestyles with the goal of simplifying and redesigning how they live, so they can reduce their overall spending and instead save and invest their money for the future. Community acceptance among like-minded people seems to be another reason the subreddit thrives.

While many have found success with the FIRE movement, the truth is that most people would never be happy living such a lean lifestyle, even if they could sustain it at all. Those who adhere to a “financial independence, retire early” philosophy sometimes struggle finding partners who share their values and approach to money. They are often misunderstood by family members, who conflate the idea of not wanting to work until a traditional retirement date, with being “lazy” or “unambitious.”

Before embarking on your FIRE journey, define what financial independence means to you. Decide if financial independence means that you don’t have to work at all or does it simply mean, to take charge of your financial life, get out of the rat race and live according to your own rules.

Understand your goals, values and what motivates you toward financial independence and early retirement. Retiring early because you hate your job isn’t a sustainable goal. In fact, many FIRE devotees have a calling – something that they want to do – after hitting financial independence.

FIRE aficionados estimate that “once your net worth is 25 times your annual expenses, you’ve achieved financial independence.” Many in the FIRE community use the 4 percent withdrawal rule to decide what they can safely afford to take from savings each year without running out of funds.

One financial instrument that needs to be on the top of your priority list before you decide to retire early has to be a term insurance and Health Insurance cover. This security net would protect your family if something untoward happens to you.

As Housing contributes to a major part of living expense, it is imperative that you have your own arrangement or enough to take care of this expense. Though the norm is of minimalist living under the FIRE movement, we still feel own housing is a better alternative, as it provides the comfort and also the hedge against any eventuality.

Other investments, like rental properties and passive income streams, are a big part of achieving financial independence, too. And so is frugality. The less money you need to live, the less money you need to save in order to fund the rest of your years.

To highlight the value of cutting expenses; for every Rs 10,000 per month you can trim, it means you need Rs 48,00,000 less to achieve Financial Independence at 40. (1,20,000 yearly expense x 40 = 48,00,000)

How to achieve the goal?

FIRE movement’s original concept is not “Retiring early with enough, but retiring early with just enough.” The basic math behind FIRE is ridiculously simple: spend less than you earn and save the difference in high return investments and allow compounding to do the rest.

To make FIRE work, you need to combine both aggressive savings with extreme frugality. It is probably the most difficult part of FIRE for most people with a middle-class income. So while the rules are simple, getting there is, of course, another story.

However we feel it is definitely possible to retire early with enough.

There are three basic elements to FIRE: time, expenses, and income. While there are many who consider seriously opting for this lifestyle, investing in the right instruments is key to live a stress-free retired life in your 40s.

FIRE - A most notable goal to aim for. But, the goal should be not to actually retire early, but to have the financial flexibility to lead and enjoy the life that you want at a relatively ‘younger’ age.

The goal should be, to follow your passion and to satisfy your creative side apart from the mundane.

It should be the time to create your dream, follow your passion.

It should be to satisfy your entrepreneurial dream or to take a sabbatical, or Plan your Start up at the age of 40 or the house that you had always dreamed of.

It should be to satisfy your travel bug, to visualize yourself with family in an Alpine Chalet or enjoying the Sunset at a pristine idyllic beach house.

All of this can be achieved through some aggressive investment plans during your younger years.

With a proper financial back up, and investments that give attractive returns, living a life away from the corporate offices, can become a reality.

Consult your financial advisor and start your aggressive investment plan to achieve your goal.