Best ways to Invest for your Child’s Education – Vishal Dhawan in TOI

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Don’t park all your Retirement Funds in FDs – A case study by Vishal Dhawan

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The Red Sea has shifted…thanks to the Fed

For the uninitiated, the Red Sea is a seawater inlet of the Indian Ocean lying between Africa and Asia. Thanks to the announcements of the Federal Reserve in the US late last night, and Ben Bernanke’s very clear commentary of how he expects the Federal Reserve to run its monetary policy over the next 18 months or so, the Red Sea shifted to financial markets today.

From equity markets to currencies to bond markets, there was a sea of red across the screens in markets today, be they emerging markets or developed markets. Whilst it is widely believed that market participants hate uncertainty, it seemed that they hate certainty even more. The statement and timetable from the Fed essentially covered two items

1. A tapering off of fresh buying of securities from the current level of USD 85 billion per month that they are at currently starting from later this year. Most analysts seem to expect that to be around September 2013.

2. A gradual end to all buying of securities which could happen by mid 2014.

Of course, this is provided that unemployment in the US gets lower and inflation starts to rise. There is now an expectation that interest rates in the US start to move up from end 2014, early 2015.

Whilst none of this was unexpected, the clarity seemed to have upset market participants, who wanted to run to the safety of the US dollar and US treasuries.

Whilst this reaction could well continue for a while longer as different constituents look at these events through their own prisms and risk comes off, and also move further to US treasuries where yields become more attractive, past experience indicates that events of these kind, though negative in the short term, create opportunities for investors to rebalance their portfolios, both amongst asset classes and within asset classes.

Over the last thirty years, yields on US treasuries have moved up substantially multiple times. In over two thirds of these instances, this has resulted in gains for equities as well,  especially in Asia. Such events provide entry opportunities to add exposure to equities.

It would be interesting to look at this from a historical perspective. Over the last thirty years, yields on US treasuries have moved up substantially multiple times. In over two thirds of these instances, this has resulted in gains for equities as well, especially in Asia. Thus, investors need to look at opportunities provided by events of this kind to add exposure to emerging market equities, especially as valuations are reasonable. For example, Indian markets currently quote at a trailing price to book of 2.7 against a historical average of 3.6. Ditto with forward price earning ratios, which are currently at about 14 times, against a historical average of 16 times. With most investors already underweight on Indian equities in their portfolios, we think this is a good time to start buying. In addition, cooling oil and gold prices could be great for the Current Account Deficit that has everyone in India so worried today, providing a further kicker to equities.

Other parts of Asia also seem to have similar valuation opportunities, with a very large part of Asia quoting at a significant discount to long term averages on both PE and PB parameters. Whilst buying equities is always fraught with downside risks over short periods of time, buying at reasonable valuations has always played out well over the long term. Building a diversified portfolio across emerging market equities is recommended, even though it may be tempting due to a home bias, to run a 100% domestic equities portfolio for Indian investors. Investors can also look at equities in markets like the US where a recovery could kick start a virtuous cycle, driven by corporate sitting on cash rich balance sheets, at higher levels than ever before.

On the fixed income side, with the Indian rupee under pressure due to the strength of the US dollar, and inflation likely to reemerge, interest rate cuts could get slower and less predictable, making it important that investors use a combination of both duration strategies like income and dynamic funds, as well as accrual strategies like short term bond  funds, and deposits in their portfolio. In case they were overweight duration strategies, they need to rebalance.

Gold hit a two and a half year low, and whilst it could be tempting for investors to add further to their portfolio, the significant exposure that most Indian portfolios already have to gold through a combination of jewelry and investments, would make it difficult to recommend further exposure.

Whilst it is very tempting to stay out of financial markets at this stage and come back later, market timing simply does not seem to work. So stay invested and keep investing. Of course this assumes you’re in it for the long term.

Ultimately, if you go to North India in summer, you know its going to be very hot. You don’t panic because the temperature has gone above 45 degrees Celsius.

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What does financial freedom mean?

Independence and freedom are amongst the most inspirational words in the English dictionary in my opinion. They evoke a sense of hope, inspiration, choice and joy all at the same time, and could mean very different things to different people.  For example, a very large number of investors whom I work with, when asked about their financial goals, indicate that they would like to achieve financial freedom. When I ask them what financial freedom means to them, their answer is: When I do not have to work for the money and can actively decide how, when, and with whom I choose to associate in my professional life.

Financial freedom can mean different things to different people. Financial planning allows them to be financially free i.e. decide how they wish to lead their lives. Over my years of running a practice, here are two examples of people I work with, who we believe financial planning has helped achieve the freedom to do what matters most to them.

Dr. Kumar (name changed) is a cardiologist and runs a hospital in suburban Mumbai. Irregular and long work hours mean that there is very little time to spend with his two young kids and his wife. What he really looks forward to, is spending time with his family and enjoying the kids’ growing up and continuing to stay connected with his wife. Booking and planning his holidays each year – one long international holiday, another week to ten day long domestic holiday and some weekend breaks are what he absolutely loves. The finances for these holidays are a part of his financial plan. Whilst there are clearly earmarked long term investment strategies for his longer term goals like retirement and education for the children, there are also separately defined strategies for shorter term holiday goals through the use of financial instruments that can give him the most optimal returns for these goals, on a post tax basis. Debt mutual funds of varying maturities can be used very efficiently for shorter term returns.

Sanjay and Rashmi (names changed) are currently 39 and 37 respectively and they have a daughter who is 6 years old. Sanjay runs a small sized family business and Rashmi works with a chartered accountancy firm. When most couples are just about beginning to save for their financial goals, and are looking to save for their retirement and childrens future, both Sanjay and Rashmi have already achieved their financial goals ie even if they do not save any monies from here onwards, and let their existing portfolio grow, they will be achieve their financial goals. This has been possible through a combination of a conservative lifestyle with controlled expenses, a savings rate in excess of 40% of total income, controlled use of leverage on a home loan that has been prepaid aggressively, and a diversified portfolio across equities, fixed income, real estate and gold, that is rebalanced regulary.

So what does financial freedom mean for you? Choose your financial freedom the way you want it.

This article was written by Vishal Dhawan, CFP^CM 

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A 12 step guide to managing your money in 2012 – IV

We are now in the final quarter of addressing one of the biggest myths about managing money that is, managing money is all about returns on your investment. Whilst returns are no doubt an important component of managing money, we believe it is critical to take a more holistic view on finances. A quick recap on what we have already covered as to do items for quarter 1, 2 and 3

January – Put it all together

February – Question what you really want your money to do for you

March –  Keep what matters, let the rest go

April – Plan for emergencies and contingencies

May – Put your risk control mechanisms in place

June – File your taxes correctly and diligently

July – Use technology to improve the management of your finances

August – Build a team of trusted advisors

September – Build your succession plan

October –   Invest in yourself – There is a tendency to go into a comfort zone with respect to our professions and careers, especially as we become masters at doing the same thing over and over again. Macolm Gladwell in “ The Outliers” has shared a 10000 hour rule which I’m sure a lot of you already know about. For those who don’t, the 10000 hour rule indicates that mastery in a field is driven by spending 10000 hours in it. So what happens after you have spent 20 hours a week doing the same thing for 10 years? Maybe its time to move your cheese before someone else does that for you. Just like companies spend a significant portion of their revenue on research, how many of us have a financial plan that includes spending a portion of our income( or our wealth) on improving ourselves. As Warren Buffett says “ Investing in yourself is the best thing you can do.”

November – Accept that you are an investor – Whilst most of us start off as investors, there is a high risk of becoming a speculator along the way. The difference between an investor and a speculator is two fold in our opinion – firstly, an investor thinks more with his brain and less with his eyes,  and secondly, an investor knows what he owns, why he owns it and can explain that clearly. Avoid buying an investment just because it has done well in the recent past or because it excites you. As George Soros says” If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” In case you cannot avoid speculating, restrict it to a very small portion of your portfolio and understand that you are speculating, not investing with that portion of your wealth.

December  – Review your plan and rebalance your portfolio – Whilst its great to have a plan and even better to implement it, its important to ensure that it is on track to deliver what was expected from it. Whilst different types of investments deliver results over different time frames, it is critical to evaluate that the overall plan is moving in the direction that you wanted it to. Whilst it is good to spend some time on the specific products that you have invested in, the overall allocation across different asset classes is ideally where the focus should be, so that assets that have become cheaper can be added to in the portfolio, and more expensive assets can be reduced. This simple strategy of rebalancing , at least once a year, can make a significant difference to your overall portfolio returns.

Whilst we are already at the end of February now, it is never too late to start in case you have not started implementing this calendar already.

This article was written by Vishal Dhawan, CFP^CM 

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