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Linkfest #2: Investing Thoughts

2007-01-05T18:42:00.001+05:30

After a long vacation, I am back. Sorry for not informing you all about this long vacation. I am preparing an article on "Risk of Inflation" for the game plan series. Found good articles while browsing, hope you wouldnt like to miss it.

Smart investment strategies (Rediff)
10 tips on how to make MORE money (Rediff)
How to avoid mistakes & make safe investments (Rediff)
Investment motto = Earn - Save - Spend (Rediff)
5 common investment myths (Personalfn)
Case Study: Too many funds spoil it (Personalfn)

Hope you remember the first step of the Game Plan, Invest in yourself. Bye for now, would be back with interesting posts.

Game Plan: Step 2 - Know your risk tolerance

2006-12-28T17:22:00.001+05:30

Know your risk tolerance. There are two kinds of risks in investing: the risk of losing money and the risk of losing an oppurtunity to make money. Both are in conflict. Take for the case, if you invest in some instruments, it may lose some or all of your money. But due to the fear of losing your money you are missing out on making some good returns through investing. We should always have a good defence in the form of risk tolerance/protection built into our investment game plan.

Without having a risk protection built into your investment game plan, you are driving a F1 racing car without any brakes. You will experience high speeds and the thrill of that, but without brakes you will end up in a crash. There are few questions which when answered will help you in gauging your risk tolreance. See yourself in the situation explained and answer honestly to the questions, this would be a revelation to you.

Risk Quiz:

1. Your portfolio of investments is invested 40% in Debt funds and 60% in Equity funds, according to a long term goal plan. After 6 months you find that your equity funds are down 10 percent, even sensex is down 8%. Market analysts are not sure which way the market will slide to, You..

Sell all of your equity funds and invest those in Debt funds
Stick with your investment game plan
You will sell your Debt funds and invest in equity funds

2. Your equity fund gave a return of 25% in 1995, 20% in 1996. It looked good to you, so you invested in that fund. Now the returns from that fund are as follows:

1997 : 18%
1998 : 15%
1999 : 12%
2000 : -8%
2001 : -20%

During this period, you...

Can't take the pain of 2000 into 2001 and sell
Decide to hold through all the five years
Move to a IT fund in 1999.

3. Your core fund has given you an year on year return rate of 10 %. You hear about an infrastructure fund which is posting nearly triple digit returns, and you heard good about the fund manager, You...

Do nothing
Sell 5% of your core fund and invest those in the infrastructure fund
Sell 35% or more of your core fund and invest those in the infrastructure fund

4. Following question 3, say you invested 5% of your portfolio in the hot infrastructure fund and after 2 years, this fund represets 12% of your portfolio, You...

Were the one who selected option 1 in question 3 and still wont do anything
Sell half of the units in the infrastructure fund. You still have confidence but still you want to take some money back
Thrilled by this infra fund, you invest more 10% of your portfolio in this

5. In early 2000, you learn that an IT fund gave a 120% return in 1998 and 170% return in 1999. You invest in this fund. By the end of 2000, the fund crashes and loses 90% and you dont expect the market to rebound soon. You..

Would have never touched this fund ever
Sell and take almost 10% of your investment which is left
Stay the course while you watch another 70% of what was left disappear in 2001

Give 1 point where you have chosen 1st option, 2 points where you have chosen 2nd option and 3 points where you have chosen 3rd option. Not calculate your score.

5 - 7 points - Conservative (Risk averse)
8 - 12 points - Moderate (Risk steady)
13 - 15 points - Aggressive (Risk seeker)

There are various other surveys which can give more better and accurate results. Some of them are

Game Plan: Third C - Courage

2006-12-27T19:03:00.000+05:30

We would be discussing about the third C, "Courage". Commitment and Consistency are the pillars of your investment game plan but Courage is the foundation of these pillars. When markets go burst like in May and in December, only Courage will help you stay the course. Only courage can help you to follow your belief and your investment game plan i.e system. As we have seen in the previous post Game Plan: Consistency, to make probability work for you and not against you, You should have the courage to believe in your system, since its yours. This doesn't mean that we shouldn't learn from the mistakes we make. This means that you shouldn't avoid believing your system just because the market crashed and things like that which are not rationale.

Remember the tech bubble which got burst! People who had invested earlier where getting very good results. But you had after looking at company valuation (will tell later in the series, how to valuate a company), you decided that their fundamentals are not right. So you didnt invested in these companies, but looking at the returns your peers are getting, you start thinking that you have made a wrong decision.

So you enter into the market when the market is at its high and you loose all your money. This is the result of having no courage to believe in your methods. If you had courage to believe in your method and system, then you would not have invested into the tech sector. This is the worth of courage.

The biggest challenge in investing is to stay away from investing while others are printing money!!

Hence Step 1 is not about calculating your long term, medium term and short term goals. Rather its about fine tuning your mind to these set of values. Remember, stock exchange is not going to be closed tomorrow. Stop worrying that you may miss the bus. Stock exchange will remain there always but before the next bus arrives, be sure to make yourself learned enough to avoid missing the bus. You have to invest in yourself first, so that you have confidence in your methods.

Any financial planner can chart your long-term, medium-term and short-term goals. But if you dont follow the plan, will you be able to achieve your goals? You should have

Commitment to your plan,
Consistency with your plan
Courage to follow your plan

This will help you in the long term.

Quote of the Day:
The easiest person to deceive is one’s own self.
--Edward George Earle Bulwer-Lytton

Game Plan: Consistency

2006-12-26T18:16:00.001+05:30

Consistency is a very essential attribute for an investor. You should be consistent with the way you approach the task of investing. If you are not consistent enough, you may lose this game. Basically investing is a game of probability. When you toss a coin, the probability of getting either an head or a tail is 50%. Now you toss the coin 3 times and the coin turns up as head, you would probably believe that now its the time of the tail to turn up. The probability of getting a tail is higher now. Right?? Answer is NO. The probability of getting tail/head is still 50%.

This is same as in investing. If your approach is right and when you calculate your risk properly and increase the probability of being right to 80%. So you have set up your investing process. Now following this investing process, you start investing but you are making steady losses. After some more losses, you start having doubts on your methodology and eventually, you move to some other process. But you would never know the losses which you were making were 20%. This is why you should have consistency. You should have belief in your system.

How can you be consistent? You can be consistent by saving a certain amount of money every month. You can be consistent by keeping on reducing your expenses regularly. You can be consistent enough by increasing the cash flow, the buzz word is being consistent. These are small drops, but eventually these small drops would form the ocean.. Keeping on waiting for the rain will not help.

I would like to be consistent in these following areas:

To keep myself updated in all financial areas
To save 50% of my monthly salary (I am a bachelor, so can help with 50%)
Read atleast 4 financial books a month
To reduce my expenses 10% a month.

Whatever field you want to be consistent in, just make it quantifiable. If you maintain it for a month, give yourself an inexpensive treat. This way you would keep the tempo high.

Let me know what you would like to be consistent. How?, by adding comments.. By stating it you make an commitment to yourself. (Haven't read about commitment, read this post Game Plan: The Three C's)

I am making my commitment to be consistent in the mentioned points.

Are you committed to be consistent??

Game Plan: The Three C's

2006-12-22T17:05:00.001+05:30

In the game of Investing, we need the help of these three C's. These three C's will guide us in trouble times and will help us find the right path. The three C's are

Commitment
Consistency
Courage

Commitment: You should be committed to self-discipline, continuous self improvement in the form of learning and committed to yourself and your family. I can't stress the fact self-discipline more than anything. You have to be highly disciplined so that while investing you are able to keep your emotions away. You should make a very rational decision. Just think of a situation where you have invested 1 Lakh and it has became now 65,000. Will you able to absorb this kind of emotional loss and think rationally? This is the acid test.

Investment involves understanding the behaviour of the market and the people who operate in the market. There are 3 kinds of people who operate in the market, speculators, traders and investers. Speculators are like gamblers who come to the market when newspapers are full of articles about the rising sensex. Traders make their living out of the volatility of the market. It involves very high risk. And the last creed are investors.

Benjamin Graham defines investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.

Investing is not like passing your 12th exam. Its like a doctor's degree. You have to keep reading, keep on improving on what you have learned by reading, listening to others and exchanging ideas with others. To say in simple words, Investing is not an easy job and that why Fund Managers are paid an hefty amount!

You would find the instant profit, instant gratification of the speculators attractive. Newspapers and TV channels would be buzz with them, but you would have to hold your ground to avoid getting swept away with these. This would require a strong commitment to your ideas, in yourself and your ability. Investing tests your mental and emotional skills because its your hard earned money on the line of fire. So you should be ready like a soldier. This is not an easy game, but dont worry, we all as group can ride this rough game till the end, but then again we would require commitment. The buzzword is commitment.

Game Plan: The beginning

2006-12-20T18:54:00.001+05:30

Every beginning starts with a single step. Before beginning the game plan, we need to set the agenda. This would allow us to remain on our path while we go around all the available investment vehicles etc. We would cover the follwing things:

Invest in yourself
- Get the "game plan" mindset
- Know your risk tolerance
- Know your goals
Create a Game Plan
- Get the stock/fund/company fever
- Get an offense and defense
- Pick the players
- Know your team
- Get to know the players
Stay the course
- How are you doing?
- Write it up

Along with this, we will deal with these 7 issues. These 7 issues are those which we are always worried about.

Cash flow planning
Tax planning
Retirement planning
Estate planning
Insurance
Special Issues
Life planning

Cash Flow Planning is about how the money for daily living comes, how it is spent and how much goes for saving. This is the crux of all. If your cash flow is planned, then all can be planned accordingly

Tax Planning, a good CA can very much help in Tax planning helping in legally avoiding giving a huge amount of money to government, which anyway is going in to the politicians/bureacrats pocket.

Retirement Planning is to be done, when you wont have a steady cash flow, so that "Sar uthake jiyen".

Estate Planning is all about writing proper will, so that your property doesnt goes back to the government in case of any conflict.

Insurance is all about hedging your risks. Risks include disability, death etc. Note, I am only mentioning hedging. When you hedge your risk, you should reduce the cost of your hedge. Will write more on this later.

Special Issues like school/college education, child marriage, providing for your parents etc.

Life Planning should be done, because the circumstances like job, location, marital status and all of these keep on changing. Our game plan should be able to adjust to these events.

These all things need to be planned up. Then only we will be able to live our life without any financial worry. So will see you all tomorrow.

Investment Game Plan

2006-12-19T18:58:00.001+05:30

I would like to start a series of Investment Game Plan. In this series I would be posting from the ground zero on total wealth/investment management. The Game Plan would confirm to these rules. (This series is heavily derived from "Creating Investment Game Plan" book)

Principal protection
Be your own benchmark
Buy and Adapt
Whatever your age, get an offense and defense
Plan short term for the long term
Look at risk as well as return
Hit the books and internet
Avoid sectors
Keep score

These are the ground rules. Would update with the first post on this series tomorrow.

Linkfest #1: Don't steal, Govt. hates competition

2006-12-14T17:56:00.001+05:30

Linkfest is a collection of links, which I have personally visited and have found useful. This way you all will not have to peruse through the web to find good articles.

Apologies for not posting for a long period. I was remodeling the blog. Hope you all like this new look. I would be glad to know how you all find this. Taking a cue from theinvestorblog, I have came up with my own Linkfest. theinvestorblog has good linkfest's. Many articles are quite good.

Income on Rs 70 lakh tax-free! (source: Rediff.com)

This article explains how a good chartered accountant can make a huge difference. There are many intricacies associated with Indian tax laws. Here the friendly CA had made the whole 70 Lakh tax-free and also the income due to the 70 Lakh is tax free!!!! Isnt it a great deal.. I would suggest that every individual should have a good lawyer, good chartered accountant and a good financial adviser. Money spent on this, is Money well spent.

As I have seen, during the month of June, when there is a rush to fill in the ubiquitious SARAL form, we just pay a sum of around 150 - 250 to get it filled and filed. Thats it.. Most dont use the services of professional CA/tax/financial advisers. Spend time with your CA and learn it.. Any good CA would be able to explain the intricacies of the tax law with ease. Its not only the matter of how much money your CA would be able to save from tax, but also how the CA is making you at ease with your money!

5 things NOT to do with your money (source: Rediff.com)

The 5 things which you should not do with your money are: (Good reasons are provided)

Don't hoard your money in a savings bank account
Don't invest your money based on hearsay
Don't manage your money without a plan
Don't invest all your money in the same avenue
Don't lose track of your money

The secret to becoming RICH (source: Rediff.com)

This explains my favourite concept in money management, Compound Interest. Don't lose sight of this powerful concept. If there is no compounding, don't go for that investment avenue if you want your money to work more harder than you. Dividend re-investment is also a kind of compounding.

These are the links of the day. As and when I find interesting links, would be posting my thoughts on them.

Technorati tags: Linkfest

Label Tags: Linkfest

Quote of the Day:
You can tell the character of every man when you see how he receives praise.
--Lucius Annæus Seneca

Good thought on Insurance by one of my reader

2006-11-21T16:45:00.000+05:30

One of my reader, Ranganathan mailed me his thoughts. We both are classmates/hostelites. We have shared a many thoughts and this is one among them. I was planning to write related to insurace and the likes of it. Good that you brought this up Ranga, I would have never explained the same thing as lucidly as you have done!! I would like to invite you to contribute articles on this blog.

Machee,

I bought outlook money yesterday. There, my Dad found one v.nice info, as below: (it is very much the same as you say!!) Its regarding life-insurance. For an endowment plan, premium is Rs 5000 per lakh of SA. So, for 10L, its 50000INR. And, we pay this for 20 years, & at the end of the tenure we get the double SA, that's 20L.

Instead, if we take term insurance(no returns, pure insurance only), the premium is Rs2500 for 10L cover. Now, we invest the difference (50000 - 2500 = 47500) in PPF, which gives 8% pa, with same safety as the previous plan. So, we get the same cover now, & the returns is almost double (47500 per year * 20 yrs @ 8% pa, calculate it yrslf). Thats Rs 23,56,198 (Use this calculator Recurring Deposits Instalment Monthly Calculator)

My dad & I were totally dumbstruck at this. But the article where this data was printed didnt tell much abt the advtg there. And, there is one more merit here: If we are unable to pay the premium even for one year, the policy is closed. & that's 50K for the former. In case of latter, that's just 2.5k, & we need just 500Rs to keep the ppf account alive. So, that's a manageable amt of 3k, in case of tight-finances.

& We get the same tax-cover also. All we need is a v.v.v.little more discipline, to invest in 2 diff places.

My dad has one great idea also: start a 12month RD in a bank to match with the LIP dates. So, we don't feel the hit of 50k outgo at one shot. & we get a 'little' interest also to enjoy!! (That 10L cover is only for example.)

And, do you have any tool / formula to calculate this: amt X per year for N years @ R%, then what's the interest gained? [RupeeManager] visit Recurring Deposits Instalment Monthly Calculator, this one gives a graphic view Savings Calculator

Regards,

Ranganathan

p.s: If any of my reader is interested in sharing and publishing their thoughts/ideas/novelties, please mail at RupeeManager [at] Gmail [dot] com
machee: Its a tamil slang for dude.

Creating an Investment Game Plan

2006-11-04T12:34:00.000+05:30

P.S: If you find this blog useful, please share the link with your friends, colleagues. It would be also be helpful to them and I would get some good readers. This would be an encouragement for me to continue posting.

Whenever we people (in our twenties) hear about the word "Investment", we relate it to Mutual Funds and Shares. In some places, discussing about Shares and Mutual Funds are taboo. Its not discussed and the children are not made aware of these wonderful instruments. I have been in this same environment. But slowly my family is changing and the young people of my family have taken the baton to bring about change in attitude. This was not easy either. So it was simple that my father was sceptic earlier. Me and my brother had some setbacks, really speaking many. First my brother started with the IPO process. It was giving some healthy returns but not all IPOs were great. So slowly as all investors, we moved to Penny Stocks. We were warned that its not good to dabble in Penny Stocks.

Yet we did and learnt our first lesson on "Liquidity". The lesson was that for some stocks like Penny stocks, you dont have sufficient liquidity i.e. you wont have immediate buyers, when you want to buy. There are also some B-group shares which you can sell only after 3 days of buying. We were professional in our approach to it. We did bought recommendation service from 10paisa.com but later learnt that it was all on momentum generation!! Anyway we learnt our lessons.

Slowly we moved to stocks in the range of 100 Rs and then moved to midcaps and then slowly to largecaps. During the begining we started with 50,000 INR capital. After all this dabling in the shares we had around 10% loss, i.e. the capital reduced to 45,000. Not a big amount for the lessons which we learnt!! ;)

As all investors we leanrt about the Derivative market i.e. Futures and Options. We learnt the basics of that. I would rather say that I was only a passive contributor. My brother was blazing all the way. We increased the capital to 1 Lakh and started dabling in futures. You people wont believe, but we converted this 1 Lakh capital to 3 Lakhs in 2 months time. It was during April - May. And due to over confidence, we took a wrong position in Reliance options and Indian Hotel futures and came the May meltdown of sensex and our capital was reduced to around 55,000. Again some lessons learnt. After that again, I lost some 23,000 in some wrong decision.

I would tell you the safeguards we used. We used to read many books, ask many people and read, read and read all the way. This was because, we both wanted to be sure that we made informed decision.

I am telling this story not to eulagise myself. But to tell you about the process which we both, me and my brother went through. This process has been quite worthy because we both leanrt our lessons fast and since we both are young, the money we lost can be got back. So you can see we lost a real worthy amount. But there are as such no qualms. I know that some people would call us fools. Its very easy to say that we should maintain discipline and control our mind, when you come on line of fire, when you have placed your money on the market, then greed and fear forces take over your mind. Then you cannot control your emotions. We have experienced this personally. After having greed and fear in your mind, you cannot take rational decision. This was the biggest lesson learnt.

So people, as some one said, "Stock market is a gold mine, it opens in the morning and allows people to collect as many gold as possible. Its upto the person to make full use of the oppurtunity!!".

Many of my friends ask me about the shares market, derivatives and all these things. I know that not all people can handle the loss which share market can give. So I ask my friends one question, "Can you afford to lose 50,000 or more?" This is for futures market. But my advice is, Invest the amount which you can afford to lose.

Sorry for no post during this week. I am reading a book titled "Creating an Investment Game Plan". Its a good read. It gives a holistic view of the investing process. Hence investing is not just buying some shares and stuff like that. Its a plan, which we need to make. I will shortly post a link to the pdf version of this book. People investing is a big process where we take small steps to achieve our target. Sorry for the long post, this I made because at time I receive some absurd request. To quote one, once my friend told that he will give me 1000 Rs a month and I have to give him 1100 Rs at the end of the month. This amounts to 10% returns per month and 120% per year!!! My friend was just thinking that share market is an easy place where we mint money!!. People who have such a high kind of return expectation should also be prepared to lose the same kind of money.

Do join me in the journey, which I would be starting in some time. I have been receiveing some good traffic. Please leave a comment saying, whether you found the content useful, useless, some corrections or any advice! I would be glad to receive it all and implement it.

Demystifying TWINVEST

2006-10-26T17:05:00.000+05:30

Update 2 I would like to bring attention to an interesting piece of discussion going on at SIP, should I do it??. Please look in the comment section from here

I have added some blogs on the right hand side which I read. They are theinvestorblog, guide2mutualfunds and ulip. They are quite interesting. Infact there is one good article at the ulip blog which is at Which charges have the biggest impact on returns. Quite an interesting read.

Update: I have added a comment at SIP, should I do it??. It contains bit more explanation of the alternate scenario. Thanks Deepak Shenoy for the wonderful comment.

Hope all of you had a very happy Diwali and Ramzan. I am back with my articles. A Rupee Manager reader mailed me with some questions and comments. I am glad that my readers are taking good interest in their financial matter. I would answer the questions along with the mail.

p.s: Those who havent yet read my post on TWINVEST, read it at SIP, should you do it?

Hi,
These are my understanding of your twinvest plan:: (I couldn’t see the xls, so all these are from the screenshot.). See if I’m right?
1. We hold more cash when the NAV is more & hold less cash when the NAV is less. (ie, buy more when NAV is less)

You are right, but looking otherwise, you buy more when NAV is less and buy less when NAV is more. So average price of the unit comes down. This means that you are buying the MF cheaper and hence getting more value for your money.

The first thing you should forget is that markets will remain +ve/-ve. Your investment stratergy should not be dependent on how markets move. On a positive note, if economy is booming then markets over a period of time (> 5 yrs) will be positive.When markets rise, the NAVs also rise. As NAVs rise, you are tempted to invest more. If you look from other side, the market is luring you into it.

2.The work-out looks at the redemption at the end of 1yr. If we decide to hold for more yrs, then the SIP will fare better in +ve markets, due to more units.
3.For –ve markets, we have a cushion by way of the cash. So, twst fares better that way.

4.However, such style of investing needs much much more discipline. Normally, one tends to do at one go, which is v.wrong for the market-based instruments like MF. So, better is to use SIP, where we give away the control & employ rupee-cost-averaging. That is reasonable. But in your twinvest, one needs to do it by self & yet not allow oneself to be pulled back-n-forth by the NAV’s.

Well to have less risk you would have to do some work.. No pain no gain. You cannot expect your money to grow better unless until you water it better!!

5. Since the purchase of units is at our control, we can go for a finer-granularity, ie., do it every two-weeks, for better v-c-a effect.
6. One needs to take into account the overheads for this style. Say, the additional efforts, the money that goes into sending every cheque by post/courier, and the entry loads & etc……
7. Entry loads:: most of non-sip MF-schemes have entry loads, after the NFO period. So, we need to factor in that also.

If you go for finer granularity like 2 week, well and good. The system would be able to tap the volatility much better. Looking at overhead, some of the banks offer you the facility of buying/selling MFs on the net. So the overhead of post/courier is eliminated. Regarding entry loads, since we are going to be in the market for more than 5 years, the 2.5% of entry load shouldnt deter you, if the MF is under a good MF manager. But try to look for MFs which have no Entry load and some exit load till 2 years/3 years. Since we wont be selling it so soon, this way we negate the bad effect of entry load on our unit.

Feedback: Pl follow DD-MM-YYYY format for dates, as we are used to it more.
In the “points to be looked” part, you have completely left the cash-at-hand quantum for twinvest. That is a much greater attraction, na?

;) Sorry for the mistake. Will surely take care about the date format in my further excels. Regarding the cash-at-hand quantum, I should have mentioned it. Thanks for your reminder

Even after reading that article, I am not fully convinced of what it targets at, for the quantum of efforts put in!!
This twinvest might be v.good theoretically, & with examples too. But honestly typing, I would love SIP for the sheer convenience of it.

1 “Long-term investment horizon”: How long is it? 1yr? or 5yrs?
2 “Second, TWINVEST likes MFs which are agressive and little volatile.”:: What do you mean by little volatile? Do you say a bit of volatility is better, or do you say there must be v.little volatility, or you say it mustn’t be volatile at all? (If first: put “a little”, if second: put “v.little”, if third: make it more clear.)

"Long-term Investment horizon" means you remain invested for a minimum period of 5 years. Sorry for the goof up in volatility. Any MF which moves within a volatility range of 7% - 10% is good. I would try to be precise in my future articles.

p.s: Please let me know about goof ups like this. This is my first blog and I am learning on how to present the concept. Let me know your feedback/comments. This would greatly help me and other readers.

Feedback for this blog

2006-10-18T10:46:00.000+05:30

Some of the readers have mailed/sms'ed me with their feedbacks. I would like to post them here.

Ranganathan says:
MAchee,

Write some articles on the various vehicles da. So far, its mainly on planning-planning-planning, I feel.

You could have done a detailed article on MF’s before going to sip, twinvest etc. You remember the target audience?

Similarly on other branches as well

These comments and feedbacks boosts my enthusiasm because people are able to understand the need for money management. I have a total of 42 unique visitors and out of which 16 are returning visitors. Its a boost to my morale and a big responsibility to sustain the expectation of my readers since they are spending their time on my blog and I want every second they spend on my blog worthy.

One message on SMS:
In your Blog, also mention how much min and max % one must allot for spending beyond basic expenses. Like moviews, spl-food, gadgets, books, etc entertainments. You see, no point in investing while leading an ascetic life. Must enjoy present day first, yet be in control.

I have planned to divide my posts in catergories like Planning, Specific investment vehicles like Bonds (NSC), Mutual Funds, Stock Market, Asset Allocation and Networth. Let me know if you would like me to write on some other topic.

I would like you readers to please mail me with your feedback at wealthcreate[at]gmail[dot]com (replace [at] with @ and [dot] with . ) or sms me on 9980142474.

As diwali is approaching, I wont be able to post articles on regular intervals. I would be back to my usual routing on 25th October.
I would suggest these books to be read The Intelligent Investor, The secrets of the Rich, Getting an investing game plan. I would recommend to buy the hard copy of these books. They are worth buying. I derive much of my analysis across these books and practical experience.

Wish you all a happy diwali

Traits of Rupee Manager

2006-10-18T10:34:00.000+05:30

To give you an idea of how a rupee manager controls what they have, note which statements apply to you;

The Poor Rupee Manager

Spends all their pay immediately.
Must have it now, no matter how it hurts or how much credit they use
Has no goals or plans other than to be rich and famous
Follows the crowd and their friends
Mixes with people who have similar money problems
Believes they don’t need advice
Has no interest in gaining financial knowledge
Spends on items which lose value, e.g. Cars, stereos etc.

The Good Rupee Manager

Saves a minimum of 10% out of each pay
Minimizes borrowing for items which depreciate in value
Has definite goals, e.g. 6-12 months, 5, 10 and 20 years
Has a plan that they actually implement
Mixes with people who are successful money manager
Knows that strategic spending is a must
Seeks professional advice and has a wealth coach
Is keen to learn new things and ideas about money mangement
Invests in items which gain in value by quality

Author: Greg Dempsey – Investor/Marketer
Title: Money Manager

http://www.OpulentWealth.com

Workable financial plan

2006-10-17T17:04:00.000+05:30

I was busy with my personal life, so delay in posting. Today I am here with a workable financial plan (inspired from personal planning).
So the basics of a workable financial plan are

Identify what needs to be done. Where are you? and not where you want to be?

Define when you will reach the goal.

KIS/KIF Keep it Simple, Keep it Flexible.

Explore (in written form) possible paths to reach your goal.

Prioritize the activities along the path you have chosen to reach your goal.

Evaluate your plan. At least once a month track your progress on some visual medium.

Keep pushing toward the target date.

Close it out. Evaluate where your plan was successful. Indentify where your plan was not successful and make that the goal of your next plan.

Without a financial plan we have a tendancy to get too wrapped up in the present and we lose perspective of how to address what tomorrow may bring. If we intend to grow in any part of our personal or professional lives we must map (plan) what we want our future to look like.

Power of Compounding and Time

2006-10-10T12:40:00.000+05:30

Dumb things people say when I ask them about investing..
I'll invest money later
I dont know about shares and its gambling
I wont be investing at all, its very risky

See the flash simulation with more clarity.

The easiest way to get rich, is to Start Early!

Every gold piece you save is a slave to work for you. Every copper it earns is its child that also can earn for you. If you would become wealthy, then what you save must earn, and its children must earn, that all may help to give to you the abundance you crave.

In my earlier post Asset Allocation uses the power of compounding. You have the evidence right in front of you.

We will take up a case.Assume two friends Abhay and Vijay. At the age of 18, Abhay's father gifted him INR 50,000 in the form of a Fixed Deposit earning an yield of 8%. Condition being that Abhay can use this money only after his retirement.Also Abhay's father said that he will contribute INR 5,000 till Abhay's retirement.

Vijay's father gifted him INR 50,000 with the same condition but invested in a diversified mutual fund earning an yield of 11%. Vijay's father will not contribute any further amount.
Abhay and Vijay compare their gifts and vijay is very much disappointed. They both decide that they will compare the invested amount every 10 years.

After 10 years: Abhay's amount stands at INR 1,84,454 and Vijay's at INR 1,49,457. Vijay is very much dejected.

After 20 years: Abhay's amount stands at INR 4,82,895 and Vijay's at INR 4,46,750. Again Vijay leaves sad.

After 30 years: Abhay's amount stands at INR 11,45,327 but Vijay's is at INR 13,35,404. Vijay is delighted but very much confused. Vijay is thinking that Abhay's father invested more money, but still how he stands to gains.

After 40 years: Abhay's amount stands at INR 26,15,688.79 and Vijay's is at INR 39,91,724.
Now Vijay, much confused, decides to find out the reason and he finds out about the power of compounding. Abhay's fater invested 50,000 + 40 x 5,000 = INR 2.5 Lakhs but Vijay's father invested only INR 50,000 and it has grown up to such a huge warchest!! This is the power of compounding.

Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.

Asset Allocation

2006-10-09T14:14:00.000+05:30

Asset allocation is the process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio.
The consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of stocks or bonds is secondary to the way you allocate your assets to high and low-risk stocks etc.
I am presenting a simple asset allocation stratergy. Here it goes

Singular Allocation:
Rs 1 Lakh is invested in a 8% yield fixed deposit for 30 years. This gives us INR 10,06,265.69 after 30 years.

Diversified Allocation:
Here we divide 1 Lakh available with us into 5 parts each of 20k each.

20,000 is lost = INR 0
20,000 in saving account yielding @ 3.5% = INR 56135.87
20,000 in fixed deposit yielding @ 8% = INR 201,253.14
20,000 in a decent MF giving a yield of 10% = INR 348,988.05
20,000 in an aggressive MF giving a yield of 12% = INR 599,198.44
Total = INR 12,05,575.50

	Differential Allocation	Singular Allocation
Return on Invst.	1105.58%	906.27%
Total Amt invested	INR 80,000	INR 1,00,000
Real return on Invst	1406.97%	906.27%

This is 1Lakh invested for 30 years. I have created an excel sheet wherein you invest Rs1Lakh each year till 30 years and then you can compare the returns.
Download the Asset Allocation.xls from here

SIP, should you do it??

2006-09-26T19:12:00.000+05:30

SIP, "Systematic Investment Plan"is being widely advertised by the Mutual Funds (hence forth I will refer it as MFs) and finance advisors as the best way to over come the volatility of the stock market. I am would like my readers to know about TWINVEST, a method developed by Robert Lichello in his book "How to Make $1,000,000 in the Stock Market Automatically" explains about TWINVEST, though Robert talks about AIM(Automatic Investment Management) which tells you when to buy and when to sell. (sidenote: Will write more on this in later posts).

Me and viswanathan have developed a excel sheet which compares TWINVEST and SIP. The file can be downloaded at:

twinvest_magnum_index_fund.xls (Screenshot)

Results

This screenshot shows the differential gains which would have accrued based on Magnum Index Fund using TWINVEST versus SIP.

Parameters

The only parameter is the amount which you can invest monthly. Thats it. Just enter the amount in the designated column. Now when you are going to make your monthly investment, you have to enter two things

Date of your investment
Price of one unit of the MF

The sheet will tell you how much amount to invest and/or how many units to buy in this month. Just follow it. This system is perfect except that it starts accumulating excess cash after some time. So when the cash exceeds say

12 x amount you invest monthly

, then just start a new twinvest. i.e You can start buying new MF with the monthly contribution which you make. But you have to enter the two things mentioned above and buy the units. The only thing is that your old TWINVEST has became self dependent. It would demand cash when it requires, thats it.

Now the cautions: This method is not for those people who expect to reap huge profits in a small amount of time. TWINVEST would give you better results only with time.

TWINVEST was designed to match the results of SIP with less risk.

So TWINVEST would suite people with long term investment horizons.

Second, TWINVEST likes MFs which are agressive and little volatile. So it would perform better if it is used on agressive equity funds. Agressive equity funds are those which invest predominantly in Midcap stocks and in sunrise sectors. To show the performance of TWINVEST I have used an Index fund.

Work is going on modifying the method to perform more better. Comment all your queries/doubts.

Are you wealthy?

2006-09-15T13:01:00.000+05:30

Do you think you are wealthy? In the book "The Millionaire Next Door", there is a formula by which you can determine whether you are wealthy.The formula is,

Multiply your age by your pretax income from all sources (except inheritances).
Divide that number by 10 to arrive at what your net worth should be.

I am 22 years of age and my pretax income is around 3,50,000 then my networth right now should be (22 x 350000)/10 = 7,70,000.
The book doesnt deals with why the use of number 10, but my hunch is that, we are discounting the money earned/accumulated till the age of 10.(We would have spend all the pocket money received on ice creams and all those chocolates).
Anyway, assuming that we are accumulating money from the age of 21, my new adjusted formula would be

Multiply your age by your pretax income and divide that number by 21

So my networth should be (22 x 350000)/21 = 3,66,666.66 but my real networth is 48,500 + 15,000 = 63,500.
Well then I am not wealthy.

Related:
How much are you worth?

Financial Personality Traits

2006-09-01T16:48:00.000+05:30

The personality traits are

1 – The Research-everything

• There is nothing wrong with research and you should do your homework before making major financial or investment decisions.

• However at some point, research must come to an end and action should take over thereafter.

• If no action takes place, then this can lead to analysis paralysis, where the individual remains in a perpetual state of preparedness, always seeking a little more information, or clarification before moving forward.

2 - Credit Card Shopper

• This type generally has all the credit cards you can think of.

• Because there is essentially no cash transacted with any of their purchases, they psychologically feel no money has been put to use and continue spending like there is no tomorrow.

• They therefore easily fall into the biggest consumer debt trap that there is, credit card debt.

• The answer for this lot is to remove all forms of credit cards and, if they must have a card, then it should be a debit card. This is a card that is preloaded with a fixed amount of cash and you can only spend what’s on the card and not a penny more.

3 – Spendaholics

• This type must buy something, anything. This is what gives them a rush.

• This person should never be allowed into a shop without a pre- agreed plan on what it is they will do in the shop.

• This type of person should only enter a store after they have made a list of exactly what essential goods they are going to buy and to stick to that list.

• This person should never have access top a credit card, as they will not have the discipline to use it correctly.

• Only cash accompanied by a specific list drawn up prior to entering the store should be used.

4 – Cheapest Possible Price

• This one has a different type of disorder in that they will not be anything unless it’s the absolute cheapest price that there is.

• This disorder is often masqueraded as one of “getting the best deal” out there.

• This stems from many things, among one of which is fear of spending any money.

• The problem here is that many times the absolute cheapest item is just that…..cheap. In many cases the products do not last at all and one ends up paying a lot more in the long run for these “cheap” products.

This kind of person exactly is not aware of the cost of the article in the market and feels that the sales person is selling the article at a very high cost.

5 – Decision making Through Hearsay

• This type has no fixed opinion of their own, so they go by what others say and do.

• They conduct no research to verify any information received and take everything they hear at face value.

• As a result of this, they keep changing their minds depending on what the latest information is that has come their way.

6 – Impatient

• This type is looking for instant results on everything. The shortest route to instant gratification is what appeals to them.

• This personality type wants things done yesterday and will often abandon very sound plans before they yield any results.

• The final outcome here is that this person is forever in start-up mode because they are always trying out a new plan, since the previous one “didn’t work.”

7 – Hands off Anything Financial

• Very willing to dump financial responsibility or decision making onto others.

• They tend to duck any financial decision making that has been left to them to execute.

• They want the rewards of a good financial plan, but not the work associated with it.

• They are surprisingly shocked to find that things have not taken care of themselves.

8 – Dreamers

• This type would love to lead the good life and can often describe it to you in vivid detail.

• They however make little or no effort to get their heads out of the clouds and into reality.

• The problem here, as you can imagine, is that dreams by themselves do not pay any bills; only action from dreams can do this.

Now before you set yourself off in a major panic, just remember that we all have a little of these traits in us, so you’re not a lost cause for having spotted such signs in your behaviour. The important thing to ensure is that none of these destructive personality types dominates your financial decision making process.

Setting financial goal

2006-08-21T20:20:00.000+05:30

In a race, a person who runs a pre-defined length of space and in the shortest time, wins the race. Similarly, to find whether we have achieved our financial freedom, we need to set our financial goals.

Setting a financial goal is not like, I would like to have 10 Lakhs in my bank account by the time I become 25 or so. It has to be calibrated to the current economic situation and it is also linked to the life style we live in and many factors like inflation and stuff like that.

By achieve financial independence, I meant that I wont be working for money as such. So this means I should have sufficient money power (buying power) to lead the remaining of my life. Quite a big target.

Assuming current inflation rate to be 6%. What does it mean? An item which costs Rs100 today would cost Rs106 a year after. So the buying power of the money reduces. So to retain the buying power of our money, we should also make our money grow by atleast 6%. Not a big deal to get that kind of return. But if we do only this then we wont be able to build assets and also beome financially free. So we need a higher rate of interest. I would discuss this in other post.

So coming back to the point, we should define our financial goals like this:

1. Long Term goal
2. Short Term goal

Long Term goal is the amount of money which I would like to posses say after 10 years

Short Term goal is the amount which I would need in a short period of time, say 1 year to 4 year.

There would be many short term goals like buying a house, buying a car, buying a land etc... But only one long term goal.
So the only consideration for setting the financial goals is that the amount you set up for the long term goal should be sufficient to live the remaining life without giving up our lifestyle and the long term goal should not hamper our short term commitments.

How much are you worth?

2006-08-08T21:07:00.000+05:30

In my previous post I explained about what constitutes assets and liabilities. In this post I will deal about Net Worth, how to calculate it and the need for calculating net worth.

Want to know where you stand financially? Then calculate your "Net Worth". As I explained in my previous post,

Net worth is your total assets minus total liabilities

So lets see where I stand financially.

Assets:

Investment in ELSS	15000
House Advance	13750
Cash	20000
Total	48750

Liabilities:

Loans taken	0
Total	0

Networth = 48750 - 0 = Rs. 48750

Need for calculating net worth. I believe you would have heard about Intention - Manifestation concept. In short

Whenever you want to set a new goal for yourself, start by setting it. Take the time to become clear about what you want, but then just declare it.

Say to the universe, “Here is the goal. Make it so.”

Do not ask the universe for what you want. Declare it. Don’t ask. This is very similar to prayer, but you are not praying FOR what you want. You are praying WHAT you want. You are simply saying, “Here it is. Make it so.” It is like planting a seed in the ground. You do not say to the ground, “Here is the seed. Please, can you make it grow?” You simply plant the seed, and it will grow as a natural consequence of your planting and tending to it. It is the same with your intentions. Simply plant them. There’s no need to beg. Read about Intention - Manifestation more at Steve Pavlina's blog

By calculating Net worth monthly, you will slowly get the intention to increase your net worth. When this intention is firmly implanted in our sub-conscious mind, it will slowly manifest itself. So I would calculate my Net worth monthly.

Next post: Setting financial goals

Difference between Asset and Liability

2006-08-07T18:46:00.000+05:30

Before proceeding on our journey towards attaining personal freedom, I have to know whats my net worth.

Now what is net worth. Net worth, for a company is total assets minus total liabilities.

Cash flow refers to the amount of cash being received (positive cash flow) and spent (negative cash flow).

Assets?? Assets are anything owned by me which can produce future economic benefit (monetarily). We have many types of assets like current assets, investments, fixed assets, intangible assets and other kind of assets like good will. Keeping all these classification aside, an item which generates a positive cash flow, is an asset.

Liability are anything which we owe to others like loans, or like those activities which results in a negative cash flow.

Lets look at some examples to clear this concept. For instance, I bought a car for 4 lakhs (assume we have bought with full payment upfront). So to use that car, I need to pay for the petrol, for maintenance, for accessories. These are all negative cash flow. The only positive cash flow would be the amount you can save if you had communted by auto/taxi/public transport, which I am sure would be -ve. This is not a good deal, its a liability. If it gives me an intangible advantage in the business I am in, then its an asset.

So to say, I have bought a house with a monthly EMI of Rs 10,000 with a down payment of say Rs. 3,00,000. I am renting the house at Rs 8000 a month with a deposit of Rs 80,000 (10 x rent). So lets calculate the cash flow statement for a year (Assume a 4% interest rate)

Cash Flow per year
Positive

Interest received on 80,000 @ 4%	=	3200 (Taking only interest in calculation, since deposit has to be returned)
Rent received 8,000 x 12	=	96000
Total	=	99200

Negative

EMI payable 10,000 x 12	=	120000
Interest lost on downpayment	=	12000
Total	=	132000

So Total cashflow is 99200 - 132000 = - 32800. We have a negative cashflow of 32800. This means the house which we have bought is not an asset but actually its a liability. (Keeping aside the tax benefits)

This example is to make the difference between asset and liability clear. People generally consider buying a house, car or a laptop as investment. Unless and until these articles generate a positive cash flow, its a liability.

Do leave a comment, if anything is not clear to you. I would be glad to help you.

Next Article: I will calculate my net worth and show you the need for calculating net worth. Stay with me in this journey. See you tomorrow.

Financial freedom

2006-08-07T12:02:00.000+05:30

With Rupee Manager , I intend to track my progress to attain financial freedom. Financial freedom (as defined at wikipedia) is a well-planned lifestyle where one no longer is required to work for income to cover their expenses.

Financial freedom can be achieved in one or more of the following ways

Inheriting a legacy (not all of us have this luck)
Marrying a rich lady (worth trying ;-) )
Illegal way (dacoity)
Working and working and working (This gives us only money but still we need to work)
Generating passive income (Bulls Eye)

The first 4 ways are not in line with my goal. My goal

Cover all my expenses
No need of working

This can be only achieved by having a constant source of passive income. There are many ways of having passive income. In this blog I would chart my way towards attaining financial freedom by age of 35 (I am right now 22 FYI). My target is to achieve financial independence by 2019.

To achieve this, I would have to do some goal setting and planning, which I would gladfully share it with you.

p.s: Link back to me if you are with me in this travel