Thursday, 25 April 2019

Are You Taking Enough Risks?





 “The biggest risk is not taking any risk.” Profound words indeed!
You need to look in the mirror and answer, Are you taking enough risks to meet your goals?

Although it is often used in different contexts, Risk is the possibility that an outcome will not be as expected. Specifically in finance, it is always discussed with reference to returns on your investment. Risk implies future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from an investment.

Great things never come from being in your Comfort zone. In order to grow, we need to take risks, whether in businesses or in our careers.
Generally we take risks because there’s a gap between where you are now and where you want to be.

Risk and return go hand in hand and have a direct correlation, you want to become rich and grow your wealth, you must take the necessary risks.


 Most investors consider risk only as loss of capital or the reduction in corpus, whereas to assess risk in the true sense, we need to also consider the risk in valuation of the corpus or reduction in purchasing power due to inflation and also the opportunity cost of capital. The benchmark for inflation should not be the Government sponsored WPI or CPI but also factor in the Lifestyle inflation.

As I’am fond of saying in most investor interactions, “Ten years ago, who would have thought that we will buy a Rs 50000 phone on a whim or as a Gift for a loved one every year.” Hence the need to factor in lifestyle inflation in your investment strategy.

While comparing investment options, we have experienced that most investors also ignore the tax implications and the impact taxes can have on the erosion of the corpus. Another impact, taxes have, is on the values at which your corpus will compound every year.
Taxes on Interest income are on accrual whereas taxes on mutual funds or equity are on redemption thereby impacting the value of the corpus at the end of each year. E.g. Lets say you have Rupees one lakh and you buy an FDR @ 6%, your corpus would grow to Rs 106000 less tax @ 30% i.e. Rs 104200 and next year you would get interest on Rs 104200. The same amount invested in a Debt Fund @ 6%, would also grow to Rs 106000, but because tax is only applicable if you redeem, next year also you would get interest on Rs 106000. The investment over a period of 5 years will lead to a substantial difference due to this factor alone.

Hence, as a first rule, your investment must generate a return, which beats inflation post taxes. If you are not able to do that, then you run the risk of losing the purchasing power of your investment even if your corpus remains intact.

Between the two major financial asset classes, Equity and Debt, Equity is generally associated with risk and Debt with safe and steady returns. 
The problem arises when the investor starts taking risks in Debt Investment. The risk in Debt has been highlighted by the recent FMP crisis and the NBFC defaults, wherein the investors have lost or are very close to loosing their hard earned corpus invested in “Safe” Debt.
Risk is for equity and should deliver the option of higher returns but alas, for a few extra basis points or an extra percentage return, investors end up investing in low credit and below par Debt instruments thereby also exposing themselves to the risk of default.

The portion you need to invest in Debt as a part of your Asset allocation strategy, should be in low risk or virtually zero risk options like Government Bonds, FDRs, PPF, Arbitrage and liquid funds and the like. Please don’t look at an extra return on your Debt investment and always remember that a higher return can only come with a higher risk.

The Problem is not taking too much risk but taking too less risk or taking risk where it is not required or in the wrong asset class.
Indian investors have been playing too safe with their investments. Our investments are dominated by Debt, our portfolios are largely concentrated in FD's, PPF, RD's, traditional endowment insurance policies (since we get a fixed amount on maturity), Post Office Schemes, etc.


Warren Buffett said “Risk comes from not knowing what you are doing” 


You need to understand the vagaries of different asset classes, the risk and return matrix of each option, to make a wise investment choice and decision.

Numerous studies and the chart below also clearly illustrates that no asset class can beat Equity in terms of returns in the long term. Sensex has grown almost 390 times in its 40-year journey from 1979 as compared to 35 times in Gold and 22 times in FD.

However the growth in the Sensex has not been linear, rather it has been volatile, with a lot of ups and downs; prolonged periods of stagnation and sudden spurts of growth. But that is the inherent nature of this asset class due to the large number of variables, which determine the stock price. Investors tend to lose patience and give up midway. They also ignore the fundamental rules of the market; i.e. stock price always follows earnings and whatever the volatility, the price will always tend to reverse to the mean valuation.

A study of the history of the equity and other asset classes helps us study the probability of loss while investing in an asset class. One of the major determinants of the choice of asset class is dependent on the time horizon you have to reach your goal. To get the best returns from Equity, you need to give it a minimum of five years and above as is evident from the chart below.





The probability of loss in Equity Mutual Funds becomes zero in 5 years, whereas in Sensex, it is only 9% after 5 years and progressively reduces to zero in 12 years.



The 2008 Stock market crash was one of the biggest crashes in the recent history of the stock markets. The Sensex reached its peak level on 8thJan 2008 when it touched 20873. Subsequently when the financial crisis unfolded, the markets dropped by close to 65% to reach the lowest level wherein it hit 7,697.39 intraday and closed the day at 8,509.56 on Oct 27, 2008. After touching a low of 7,697.39 on Oct 27,2008 Sensex slowly recovered to re-scale 21,000 on Nov 5, 2010 thereby erasing all losses in less than three years. 

Lets take two scenarios; in the first scenario, lets assume that you were unlucky and you bought the Sensex on 8thJan @ 20873. Subsequently the market started crashing and you held onto the Sensex for 10 years. On 8th Jan, 2018, it had reached a level of 34353 thereby giving you an absolute return of 65% and a CAGR of 5.11%

In the second scenario, lets assume that you sold at the lowest point of the market, on 27thOct 2018at a Sensex level of 8000. If you had bought it Five years ago the Sensex, on the same day, was @ 4698.28, thereby giving you an absolute return of 70% and a CAGR of 11.23%.
Hence, even if you buy at the highest point or sell at the lowest point of the market, if you have a five-year horizon and more, you will have a lesser probability of losing money in the equity market.

According to a study done by investment firm Deutsche Bank, the stock market, on an average, has a correction every 357 days, or about once a year. While many investors, especially those new to Equity investing simply aren't used to experiencing swings like these, but corrections are an inevitable part of stock market.
However, these corrections offer a major opportunity to buy and gain substantial returns in the next one to three years.

In a broader context, while a stock market correction is an inevitable part of stock ownership, corrections last for a shorter period of time than bull markets.

Based on research conducted on the Dow between 1945 and 2013, John Prestbo at MarketWatch determined that the average correction (which worked out to 13.3%) lasted a mere 71.6 trading days, or about 14 calendar weeks. The Indian Bear & Bull cycles are also highlighted below and also show a similar trend.

Hence Equity is also not risky if you have the conviction in the asset class, understand the market dynamics, have the patience and have a long-term horizon. You may only need the help of a financial advisor who can help you ride the volatility. He will also help you make investment decisions based on the current market valuations.

Historically NIFTY trades at PE of 18 and gives the best return when it trades near or below the historical levels.



As is evident from the above data, long term Equity investment can balance the risk and provide better returns if you have the right time horizon.

If your horizon is less than five years, you need to shift to Debt or safer asset classes.
However, most investors stick with debt despite having a longer time horizon. The problem with being too conservative is, it leads to sub optimal returns over the long term, which may hamper the achievement of your financial goals.

The risk quotient is always subjective; it varies from case to case. The Risk should be in conjunction with the returns you need.
The Golden Rule is Young Investors should take more Risk and the older ones should take less risk. The real risk actually arises when the value of your investment is less than the value of your goal. Of what use will be a retirement corpus, created after saving since the last 30 years in 6% FDs, when it will only be enough to last the next 10 years only, post retirement, when even an additional 4% return created from balancing risk, would have lasted for more than 25 years.
What would you prefer for your retirement fund after investing Rs 10000 every month for 30 years; Rs 107 lacs or Rs 563 lacs especially when you know the probability of loss in equity after 10 years is negligible.



The risk you should take is dependent upon a number of factors, viz.
Your financial position: income, expenses, assets, liabilities; Family responsibilities; Your age; The time you have in hand for your goal, your own risk profile and many such factors.

You must understand that there are different kinds of risks, some controllable and some beyond your control.


Ideally, asset allocation has to play an important role in your investment journey. Consult your wealth manager or financial advisor to help you choose the most suited asset allocation strategy for you.A sound Asset allocation strategy will help you optimize the risk,you need to take to achieve your financial goals.

There are other asset classes also available, like Real Estate, Gold, Commodities etc. but the biggest drawback in them is lack of Liquidity, Big-ticket size, leading to issues of affordability, inadequate diversification and taxation disadvantages.

Where should you invest – Finally it boils down to; are you achieving financial goals or not. The Objective is not to beat the benchmark all the times but to achieve the financial goals.

The bottom-line is, if there is a difference between your risk appetite and the risk you require to take to achieve your financial goals, you need to bridge the gap. Sometimes, it is ideal to take risk even at a later age to achieve the goals and create wealth. To have the required money to actualize our dreams, we must take the necessary risk.
I remember an old saying, “20 years from now you will be more worried about the things you didn’t do rather than the ones you did.”

So, are you taking enough risk?
Consult your financial advisor today and optimize your risk return balance to achieve your financial goals.

Happy Investing!
Stay Blessed Forever!

Sandeep Sahni





Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.
About The author
Sandeep Sahni

Sandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. Hons. Class of 1985.)
Sandeep's investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.
He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.
Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals.
Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.
He also writes a well read blog;
https://sahayakgurukul.blogspot.com
https://www.sahayakassociates.in/resources/our-blog
He has also conducted presentations, workshops and guest lectures at Management institutes for students on Financial Planning and Wealth Creation.
He can be reached at:
+91-9888220088, 9814112988
sandeepsahni@sahayakassociates.com

        Follow us on:

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Friday, 19 April 2019

Market Forecast….Kaisi Lagti hai market?

Kaisi Lagti hai market? The most asked question wherever we go and whenever we meet clients, Probably the most asked Question in connection with the Indian Stock Market, but does it even matter?
Most Investors Spend 90% of their time thinking the next 5 - 10% Index Move,  while wealth is created only by investing for the long term and catching long term trends.
We all love forecasts and always look for bits and pieces of information which basically reinforces our hypothesis regarding the market.
This is what is called Confirmatory Bias and we all suffer from it.
The confirmatory bias forces you to seek out information that corresponds to your own point of view. If you're bullish on equities, you'll seek out analysts that echo your viewpoint, while conveniently ignoring the naysayers - and vice versa. You'll actively seek out magical clues, chart patterns, forecasts and other tit bits of information that bolster your confidence about your own opinions.
We all look for headlines,especially optimistic kinds that tend to make our theory look good and our investments safe.
The more jargon in the headline, the better it is. A random search on Google on market forecasts or market predictions will throw up headlines like the ones below :
  1. The stock market and stock mutual funds rallied big-time in March. The rebound left many stock fund managers with a Goldilocks stock market forecast for the balance of this year: not too hot, not too cold….
  2. Even as a full-blown recovery in earnings will be key for markets, many other risks seem to be abating for now….
  3. Call them guardedly optimistic or cautiously optimistic. Their stock market forecast calls for a much better 2019 than 2018 was.
  4. Marketsare set to open slightly higher on anticipated earnings….
  5. On the face of it, financial markets seem to sense trouble….
  6. Few experts see a recession, but signs of slowing economic growth are piling up….
  7. How will some macros play out, that will play a huge role in how stocks perform. Of all these factors, two stand out because of their unpredictability and consequences: Oil prices and interest rates…..
  8. Is the stock market correction of the past three months a harbinger of an awful year ahead, or a Launchpad for a new bull market….
  9. I would say market forces appear to be at an equilibrium. The global economy is slowing but not at risk of dipping into a recession in the near term. Still, the economy is not so strong that it's about to run off to the races, either…
  10. The market got a smaller lift from easing investor fears about a…( Fill in the Blanks as per your suitable reason…)Youmay have heard that term before, but you might not have been introduced to the most powerful indicators that are used by smart money who consistently predict market moves before the dumb money herd….
Neither here nor there, do they make any sense. I will say most headlines  are guardedly optimistic or cautiously pessimistic, consume them as you wish.
Prediction comes from a Latin word, “praedicere”, which means make known beforehand. The human brain is very powerful but subject to limitations and commonly suffers from what is called a Cognitive bias, which is often a result of the brain's attempt to simplify information processing. We all hate uncertainty and like to identify a pattern and predict the outcomes.
Whenever any talk of predicting or forecasting the market comes up,
I ‘am always reminded of a story.
“It was autumn, and the Red Indians asked their New Chief if the winter was going to be cold or mild.
Since he was a Red Indian chief in a modern society, he didn’t  have any idea about any trends or what the weather was going to be like.
Nevertheless, to be on the safe side, and to fulfill his duty, he replied to his Tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.
After some days he got an idea, Being a practical leader,He went to the phone booth, called the National Weather Service and asked 'Is the coming winter going to be cold?'
'It looks like this winter is going to be quite cold indeed,' the weather man responded.
So the Chief went back to his people and told them to collect even more wood. A week later, he called the National Weather Service again. 'Is it going to be a very cold winter?'
'Yes,' the man at National Weather Service again replied, 'It's definitely going to be a very cold winter.'
The Chief again went back to his people and ordered them to collect every scrap of wood they could find.
Two weeks later, he called the National Weather Service again.
'Are you absolutely sure that the winter is going to be very cold?' 'Absolutely,' The man replied. 'It's going to be one of the coldest winters ever.'
'How can you be so sure?' the Chief asked.
The weatherman replied, 'The Red Indians are collecting wood like crazy.'
Doesn’t it sound too familiar, That is somewhat like how the markets are predicted albeit with a few disclaimers.
Before we discuss about the suitability of market forecasts, First, a caveat: The market cannot always be predicted, but can be predicted often enough. 
In 1952, Harry Markowitz established the modern theory of finance.  In 1990 he won the Nobel Prize for Economic Sciences for this work.
Part of the theoretical underpinnings of his work include what is called Efficient Market theory.  By that, he meant that in the long run all securities are efficiently priced, and that any change in price was due to random fluctuations.
Under this theory the stock market is not predictable and you should know that all modern finance theory about the pricing of securities is based on this as a starting point.
To illustrate this point, let's assume that someone could predict the stock market, that someone would of course become fabulously rich. 
Assuming that the secret formula they used to predict the market stayed secret, they could continue to exploit this ability for the foreseeable future.
But, if the secret somehow leaked out, soon everyone would be trying it, and soon market prices would reflect this. The underpriced securities would rise in price as everyone starting buying them, and overpriced securities will fall in value as everyone would try to sell them. 
In effect, the advantage would melt away, and the predictability would be gone.  This is precisely why, in the short term, the stock market is not predictable.
One of the bedrock assumptions of Efficient Market Theory is that investors are 100% rational, which is of course impossible for humans.  The stock market is driven as much by emotion as it is by cold, hard analysis.  This is another major factor that makes the market very difficult to predict, since it's very difficult to mathematically predict irrational human behavior when it comes to money.
Having said that though, the fact is that the market isn't 100% efficient.  It's getting closer to being efficient all the time, and it's more efficient today than it was, say, 30 years ago, precisely because of the effect discussed earlier.  But's there's still enough inefficiency out there for some people and organizations to exploit.  This is exactly what hedge funds, algorithmic traders and high frequency traders try to do, and they are successful enough and most of them make a good living, some in fact make a very good living.
The movement of the Stock Market can be predicted somewhat by Technical Analysis.
The main two component of Technical Analysis are price and volume and on these two data points,the whole stock market may be predicted.
Stock Market movement is nothing but a mix and match of Mathematics and Human psychology; and Technical Analysis is all about these two attributes.
Every human in this world thinks alike and that gave birth to technical analysis.
Technical analysis relies on patterns and fractals on the price charts — price charts are created by human buying and selling activity, so everything that the whole world knows, collectively, about a given stock, is revealed by its price chart.
Certain patterns thus typically lead to predictable outcomes. So, while nothing in life (including the market) can be predicted with 100% certainty, it can (at times) be predicted with results that far exceed what can be achieved randomly.
Technical analysis works, and market prediction works, because the market is a construct of human nature, and humans acting collectively as a herd become somewhat predictable.
Is it an exact science? No, because human behavior is not an exact science and humans behave in a irrational manner especially when it comes to money.
Hence, the market is predictable only in terms of probabilities and trends.
No one can hold a crystal ball and no one will always be able to accurately predicting the market’s performance, it is not possible to predict what a stock price is going to be.

People with a good understanding of statistics and probabilities can easily understand why. Stock prices are time series generated by probability distributions. Trying to predict the next outcome of a distribution is pointless.
 
No serious trader tries to predict stock prices. Instead they place bets on the underlying distribution by either:
Modeling the underlying price distribution or related quantity (return, volume, volatility,...)
Making assumptions on the underlying distributions (i.e., using most technical indicators)
Let me give you an example. Imagine a water bottle factory. The water content of the bottles are normally distributed with mean 1000 ml (1 liter) and standard deviation 10ml.
This means that 95% of bottles contain between 980 ml and 1020 ml of water.
Now, a bottle comes out with content 1020 ml. I'm betting you the next bottle's content will be less. I'll pay you Rs100 if I'm wrong, but you'll pay me Rs 10 if I'm right. Do you take the bet?
(And if not, how much would I need to offer for you to take the bet?)

If you can answer this question you understand how traders trade.
No forecast are accurate and do not be misled by them, whoever may be the author. Be guided only by your goals and time horizon to the goals and you are more likely to achieve them.
A lot of investors have started calling us recently to ask whether they should invest more at this time. They are positive about the market as the market is on an upswing currently and touching new highs.
Our answer to them is Yes provided you have a long term view of at least five years to stay invested.
If you looking for making some Quick Money by investing at this point of time, then My Answer is NO
The very nature of the market is to remain Volatile... and it is going to remain Volatile forever. Every fall in the market is followed by a bounce back.
Historically, market falls are temporary and rise are gradual and permanent. Just to illustrate the structural upward bias of the Indian Stock Market, kindly check the chart below :


Think of year 2020, 2025, 2030 and beyond and you will not need any forecast and you will be able to keep the noise out of your mind.
 In the end, our view remains, that the best we can do as investors is to develop an approach that is logical, repeatable, and practical amidst the face of future uncertainty.
Lets remember the famous quote by Mark Twain before we are guided by any forecast.
Consult your Investment advisor and achieve your financial goals.
Happy Investing!
Stay Blessed Forever
 Sandeep Sahni
Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.
About The author
Sandeep Sahni
Sandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. Hons. Class of 1985.)
Sandeep's investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.
He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.
Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals. 
Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.
He also writes a well read blog; 
He has also conducted presentations, workshops and guest lectures at Management institutes for students on Financial Planning and Wealth Creation.
He can be reached at:
+91-9888220088, 9814112988
        Follow us on:


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