The Best Financial Resolutions for 2018

 

The New Year is a great time to overhaul your life for the better. And what better way to do it is make those kind of resolutions that will act as a constant guide in that endeavor. For this, Resolutions, like goals, are best when they’re specific.

Financial resolutions made during beginning of the New Year can determine the shape of your short and long term financial objectives whether is it increasing your savings for retirement or putting aside a little extra for this year’s down payment of that property.

If getting your financial life in order is a resolution for you this year, here are some ideas that may help you get there faster:

1. Save Smartly!:It is common knowledge that

• Income -Expenses = Savings

We suggest change that equation from this year, make it

• Income – Savings = Expenses

This new equation will help create an automatic budget, and will ensure you only spend after saving.

Use automatic investment ideas like SIPs and STPs to transfer your monthly savings to dedicated investments for your goals.

 2. Have Contingencies, for everything!:

Dangers and risks are ever present. They can have sudden and significant impact on your finances if they are realized. So it’s better to be safe that sorry.

• Having a highly liquid corpus (available to you in 48 hrs or less) is one way of doing it.
• Another useful and highly critical step is getting adequately insured. While a variety of insurances are up for grab, focus on the basics first. Sufficient health cover for your family and yourself should top the list.
• Followed by insurance for specific risks such as critical illnesses, accidents and even insurance for your home.
• Another smart thing you should do is take a insurance for any big ticket loan you may be servicing, such as a home loan. You do not want to burden your dependents in the event of you passing away, do you? 

3. Have a Strong Debt Strategy:

• Home Loans / Education Loans

Not all debts/loans are equal. It is essential for you to know which loan is drawing the most interest from you. Also some loans are useful, such as home loan as you have access to an appreciating physical asset or a educational loan from which you stand to appreciate the biggest asset of them all, yourself! Plus it does not hurt that they have tax deduction benefits.

• Personal / Credit Card Loans

Personal/Credit Card loans should be ticked off at the first available opportunity, simply because they have high interest rates. If you had to choose between investing into a fixed income product or pay off a high interest loan, you should ideally opt for repayment. Interest saved is interest earned after all! 

4. Know what you want:

It is said “If you don’t know where you are going, well then, any road will take you there”. It is better to have well defined goals. A goal helps you focus because the end objective is clear. For example, it is probably not enough to say, “I will save some money for that amazing Europe vacation that I always dreamed of.” It needs a lot of planning and finances. You not only need to know the destinations you will visit, you also need to the travel routes you will need to take, how much funds you will need, where all do you intend to spend and so on so forth. The more crisp your goal is, the better actionables you will be able to achieve.

 

5. Invest in yourself:

In today’s highly dynamic world, the word of the day is “reskilling”. As a professional, now more than ever, you have to stay on top in your industry by constantly upgrading your skill sets. Therefore always ensure you have enough kitty set aside so that you can opt for those special courses which will give you that edge in your profession.

While not all resolutions can be worked on simultaneously, it is important that you start with some and even more importantly that you stick to them. Give your resolutions time lines so you know what to prioritize. And work towards strong finances and a worry free New Year 2018!

 

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How to build your wealth using the power of compounding? Article by Shalini Dhawan in TOI

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Invest in equities when markets dip

THE RECENT fall in equity markets over the last few weeks has forced a lot of investors to worry about its impact on their equity portfolio. It has also left them clueless about their future course of action — whether they should pull out money at this stage from equity markets before a much sharper fall erodes this value further.

We, however, believe that this weakness in the Indian equity market provides good opportunity for long-term equity investors to generate superior returns on their portfolios over the next 5-10 years.

In the shorter term, equity markets always tend to be very unpredictable and are prone to sharp movements both upward and downward. However, over a longer time frame of five years and above, the predictability of stock market returns increase.

This is contrary to what a large number of investors believe, that the short-term in equity markets is predictable but the long-term is not. Thus, there is a tendency to give more importance to short term trends like an unexpected interest rate increase or a bad results from a company for a quarter than the long-term trend like young population with significant saving potential or the strength of the Indian economy, which has a very small component of its GDP coming from exports.

Let’s see how you should go about building your equity portfolio.

• Keep it simple: Trying to do too many things on an equity portfolio tends to add complexity to the portfolio without necessarily adding higher returns. For example, we come across portfolios with a stock portfolio running into a number of pages and small investments in a few dozen mutual funds. Most investors would do well to have only a handful of fundamentally strong stocks and a combination of three to five index and actively managed mutual funds with different styles and good track records.
• Buy only what would make you comfortable: This comfort differs from individual to individual. Some investors are very comfortable holding stocks of large companies that they deal with in their day-to-day life such as the bank that they have close to their residence or the company that owns the coffee brand that they have every morning. It is critical that investors are comfortable with the products that they own, whether it is a stock or a mutual fund, so that they do not overreact when it corrects sharply
• Be disciplined with your investments: Over the last few years, Systematic Investment Plans (SIPs) in mutual funds have become very popular with investors. While these are excellent tools to build long-term wealth, there is no guarantee that returns over short periods of time will be positive. There is a tendency to stop SIPs when equity markets turn negative, which beats the very purpose of an SIP. In fact, investors should be looking at enhancing exposure to top-ups through SIPs during negative equity markets, so that they can enhance the overall portfolio rate of return, if they have the liquidity.

And last but not the least, be patient and give your investments time to grow. Remember Rome was not built in a day.

This article was written by Vishal Dhawan, CFP^CM and appeared in the Asian Age on 6^th August 2011 .

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Building a recession proof portfolio

Over the last few weeks, clients have been asking me “Should I reduce my equity portfolio?”, “Fixed income is giving higher returns and is safer, should I invest there?” and other such questions indicating a gradual slide in confidence of most Indian investors. Contrast this to the situation about six months ago, when most Indian investors were extremely confident about the future growth potential thatIndiahad to offer. They were willing to take high levels of risk in their investment portfolios to take advantage of the benefits that could come with this high growth.

Whilst concerns have started to emerge over the last few months on the growth rates of the Indian economy due to domestic and international factors, we believe that investors are now getting overly pessimistic about the future ofIndia. The most pessimistic estimates that are currently available still show growth rates in excess of 7% pa, makingIndiapossibly in the top 2 to 3 fastest growing economies in the world.

Given this background, one might ask “What should I do in such a scenario?”. Here are 5 things we suggest that you do to make your investment portfolio recession proof

1. Revisit your financial goals – There is a tendency to invest without any particular financial goals in mind amongst a large number of investors. Investing without discussing your financial goals with your investment advisor is a bit like getting into a taxi and not telling the taxi driver where you want to go. Clearly list your short term and long term financial goals – be it a foreign education for your child or a new home purchase. In case any of your goals are likely to come up over the next 24 to 36 months, ensure that the funds required for these goals are in fixed income instruments like bank deposits, short term mutual funds or liquid funds. If your financial goals are long term in nature, you need to ensure that your overall asset mix is appropriate for your targeted portfolio returns, and rebalance if necessary.

2. Ensure that your portfolio is truly diversified  – Having 50 stocks in the portfolio or 30 equity mutual funds or 3 investments in real estate in a single city is not true diversification. Essentially, your portfolio should have a blend of investments that behave differently in different situations so that your overall portfolio risks are controlled – for example a real estate correction in Mumbai may not necessarily lead to real estate prices falling across India.

3 . Understand that the house that you live in is not an asset and what you spend on it is an expense, not an investment – Most people are unable to downgrade or trade down their residences homes during difficult times, making it unfair to compute it in your net worth in our opinion. Whilst a roof over your head is critical, what it costs is also very important. Therefore, be careful about how much you stretch on the EMI for your primary residence, especially in an inflationary environment where interest rates could rise significantly. Besides, only a few home improvements actually increase the financial value of your home, so spending on home improvements needs to be controlled just like your other discretionary spending.

4. Ensure that you have 10% of your portfolio in gold – With gold prices close to lifetime highs, a large number of investors who do not have gold in their portfolio are very hesitant to include gold into their portfolios at these prices. Gold needs to be viewed as a protection for the rest of your portfolio. If you are hesitant to buy gold at these prices, you could consider a systematic exposure to gold through using Systematic Investment Plans ( SIPs) in gold mutual funds.

5. Prepay your loans – With returns from fixed deposits, fixed maturity plans and short term bonds at attractive levels, it is very tempting to lock in monies at these rates. If you have outstanding loans, restrict your fixed income exposure to emergency funds and use excess funds to prepay your loans. Remember that most loans tend to be reducing balance in nature whilst returns from fixed income instruments are compounded. You may therefore need to take the help of your financial planner to decide whether to prepay your loan or buy that fixed deposit or mutual fund instead.

This article was written by Vishal Dhawan, CFP^CM and appeared in the EXIM INDIA newsletter  on 1^st July 2011 .

 

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Don’t stop your SIPs now

SYSTEMATIC INVEST-MENT Plans (SIPs) have become extremely popular over the last few years to invest in stock markets. They allow investors to take a gradual exposure to stocks by investing small amounts every month in mutual funds or in stocks.

One of the biggest advantages of investing in an SIP is the benefit of ‘rupee cost averaging’. Essentially, what rupee cost averaging achieves is that a fixed amount of money is invest-ed each month on a fixed date, irrespective of the market level.

When the markets are at a higher level, less units will be purchased with the same amount, while when markets are at a lower level, the number of units purchased will be higher. Over a period of time, an average price is achieved which is a result of purchases at the lower and higher prices at multiple levels of the stock market.

With the outlook for the stock markets having turned negative over the last few weeks, driven by both domestic and international factors, people have started wondering if they should invest or suspend the investment plan for a while.

In our view, if you stop our investment, it will defeat the very purpose of using the SIP strategy. With the markets in the bearish trend, this is actually a good time for you to invest in SIP as you can continue to get a higher number of units at lower prices over the next few months.

Mr Warren Buffet, arguably the most successful investor of our times in his letter to his shareholders in 1997 put this very aptly in the form of a short quiz: “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?” These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers”, they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

We ran a simulation for investors who invest in SIPs during the period of Jan 2008 to June 2011 when the markets peaked, subsequently crashed and then recovered significantly. We found that even though the BSE Sensex is currently down eight per cent from those levels, SIP investors in a cross-section of funds would have returns ranging from 12 per cent to 25 per cent per annum assuming that they continued with their SIPs through this period of three and a half years ago.

Considering this empirical data, we strongly recommend that investors use this opportunity to enhance their SIPs, rather than stop or lower them. In fact, we would recommend that wealthy investors who have traditionally stayed away from SIP strategies and actively try to time the market, should also use this opportunity to do SIPs or systematic transfer plans.

This article was written by Vishal Dhawan, CFP^CM and appeared in the Asian Age on 25^th July 2011 .

 

 

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