Personal Financial Planning : Personal Financial Planning 1
Investing for Growth : Investing for Growth 2
Investment for Growth : Investment for Growth Equity (stock market investment) and Real Estate are the only two avenues of investment that have consistently beaten inflation and increased the wealth of investors in the long run (10-year plus time horizons). 3
Equity & Real Estate Returns 1979 - 2012 : Equity & Real Estate Returns 1979 - 2012 BSE Sensex 01.04.1979 : 100 BSE Sensex 24.01.2012 : 16,996 CAGR : 16.94% Average appreciation in Indian real estate : 175 times CAGR : 16.94%
A word about Bullion….. : A word about Bullion….. “The great strength of gold throughout history has not been that you make money by holding it, but rather that you do not lose.” - Timothy Green Understand that ‘investing’ in gold via the ornament route is a fool’s game. 5
Real Estate : Real Estate 6
Investment in Real Estate : Investment in Real Estate Real estate is an excellent long-term, wealth-enhancing avenue of investment. However, real estate suffers from some drawbacks, such as : Poor liquidity Difficulties in verification of title Requirement of large amounts of capital for even a single purchase 7
Drawbacks of Real Estate Investment : Drawbacks of Real Estate Investment Requirement of large amounts to make additional purchases even if prices are lower Presence of black money in transactions High stamp duties on real estate purchases Cumbersome purchase and sale formalities Administrative difficulties, e.g., absentee landlordism, land mafia 8
Equity Versus Real Estate in India – the role of registration duties & taxes : Equity Versus Real Estate in India – the role of registration duties & taxes Equity Real Estate Purchase ( Rs , lakhs) 100.00 100.00 Registration fee & stamp duty 00.00 08.00 (Karnataka) Equity advantage 08.00 Sale price 200.00 200.00 LTCG tax (assumed at 12% on RE) 00.00 24.00 Equity advantage 24.00
Real Estate Investment Options for the Common Investor : Real Estate Investment Options for the Common Investor An apartment A plot of vacant urban land An independent house on a plot of land Commercial space – showrooms, shops, offices, warehouses Agricultural land Real estate mutual funds 10
Investment in Real Estate : Investment in Real Estate If you have a special talent for real estate investment, by all means invest in it, bearing in mind that the time horizon for real estate is ten years. If not, most good Indian real estate consultants advise that you invest in real estate only to the extent that you have a use for it . 11
Equity : Equity 12
Know why you must invest in equity : Know why you must invest in equity 13
Warren Buffett : Warren Buffett "The best protection against inflation is your own earning power. If you are the best teacher, you will command earning power and get your share of the national economic pie, regardless of the value of the currency. The second best investment is in a good company ." 14
PowerPoint Presentation : 15
Equity – Reliable Truth No.1 : Equity – Reliable Truth No.1 In the long-run, the market always goes up. 16
PowerPoint Presentation : 17
Warren Buffett : Warren Buffett In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497. 18
Equity – Reliable Truth No.2 : Equity – Reliable Truth No.2 The rate of growth of equity investments comfortably exceeds the rate of inflation. 19
Performance from 1981 to 2011 (Source: Central Statistical Organisation website and Handbook of Statistics on the Indian Economy) : Performance from 1981 to 2011 (Source: Central Statistical Organisation website and Handbook of Statistics on the Indian Economy) CPI Inflation : 8.30% Standard Gold : 8.79% Silver : 10.19% Bank Fixed Deposits : 9.17% Public Provident Fund : 10.72% Equity (BSE Sensex) : 16.75%
PowerPoint Presentation : 21
BSE Sensitive Index : BSE Sensitive Index 01 April 1979 : 100 24 Jan 2012 : 16,996 CAGR : 16.94% 22 Gold 1950 : 100 2012 : 27,412 CAGR : 9.48%
BSE Sensitive Index : BSE Sensitive Index 01 April 1979 : 100 24 Jan 2012 : 16,996 CAGR : 16.94% 23 Gold 1979 : 937 2012 : 27,412 CAGR : 10.77%
Know the dangers in equity investment : Know the dangers in equity investment 24
PowerPoint Presentation : “A stock broker is someone who invests other people’s money, until it is all gone.” - Woody Allen 25
Burton G Malkiel : Burton G Malkiel “While everyone recognises that brokers make their living by charging commissions, Wall Street still manages to conceal one very nasty secret: The financial ‘experts’ know precious little more than you know. 26
Burton G Malkiel : Burton G Malkiel “In fact, I will go out on a limb and tell you that the experts have no idea what stocks you should buy to provide superior future returns. A blindfolded chimpanzee throwing darts at the stock pages can select individual stocks as well as the ‘experts’.” From: ‘The Random Walk Guide to Investing: Ten Rules for Financial Success’ 27
PowerPoint Presentation : Burton Gordon Malkiel 28
Burton Malkiel : Burton Malkiel The stockbroker’s real job is not to make money for you, but to make money from you. 29
Benjamin Graham : Benjamin Graham If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market. 30
Benjamin Graham : Benjamin Graham 31
Warren Buffett : Warren Buffett “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good.” 32
Burton G Malkiel : Burton G Malkiel There are only three kinds of financial prognosticators: Those who don’t know Those who don’t know they don’t know, and Those who know they don’t know, but get paid big bucks to pretend they know. 33
PowerPoint Presentation : Burton Gordon Malkiel 34
Upton Sinclair, author : Upton Sinclair, author It is difficult to get a man to understand something, when his salary depends upon not understanding it. 35
Benjamin Graham (1894 - 1976) : Benjamin Graham (1894 - 1976) Wall Street people learn nothing, and forget everything. 36
Wall Street people learn nothing, and forget everything! : 37 Wall Street people learn nothing, and forget everything! Jeremy Grantham, US investor and asset manager, was asked, “Do you think we will learn anything from this turmoil?” He responded, “We will learn an enormous amount in the very short term, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.”
A brutal truth about equity investment : A brutal truth about equity investment In a rising market, you do not need the advice of experts to make money. Any trash you buy, will appreciate. In a falling market, the advice of the best experts will not prevent you from losing money. 38
Sign in a fund manager’s office : Sign in a fund manager’s office “Do not confuse brains, with a bull market.” 39
Prof Jeremy Siegel : 40 Prof Jeremy Siegel “Stupidity, well packaged, can sound like wisdom.” 40
Warren Buffett : Warren Buffett To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects.
Warren Buffett : Warren Buffett In our view though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices.
Warren Buffett : Warren Buffett
Know HOW you must invest in Equity : Know HOW you must invest in Equity 44
The stock market as an avenue of investment : The stock market as an avenue of investment The world’s best writers on equity investment will always urge you to “buy the market.” That is another way of saying, “buy the economy” or “invest in the economy.” In this era of globalization, the time will not be far away, when equity investment means investing in the global economy through the medium of equity. 45
Therefore……… : Therefore……… Investing in the stock market is investing in the economy of the country. No one can call himself/herself a stock market investor, unless he/she invests in the economy of the country. Anyone doing anything else, is a mere punter . 46
Refer to the paper A GUIDE TO EQUITY INVESTMENT : Refer to the paper A GUIDE TO EQUITY INVESTMENT 47
John Bogle : John Bogle Successful investing is about owning businesses and reaping the huge rewards provided by the dividends and earnings growth of our nation’s - and, for that matter, the world’s - corporations. 48
PowerPoint Presentation : 49 John C Bogle
Equity Investment Myth: : Equity Investment Myth: You need to actively monitor your portfolio and constantly buy, sell and churn. 50
Let your life be active and your investments be passive! : Let your life be active and your investments be passive! 51
John Bogle : John Bogle 52 “Buy right and hold tight.”
Warren Buffett : Warren Buffett “Inactivity strikes us as intelligent behavior.” 53
Warren E Buffett : Warren E Buffett “Lethargy, bordering on sloth, remains the cornerstone of our investing strategy.” ( Sloth: indolence; extreme laziness; habitual disinclination to exertion. 54
Equity investments are for the long-term. The time horizon of equity investments is at least 5 years. : Equity investments are for the long-term. The time horizon of equity investments is at least 5 years. 55
Rakesh Jhunjhunwala : Rakesh Jhunjhunwala “Be greedy, but be long-term greedy.” 56
Warren Buffett : Warren Buffett “Always invest for the long term.” “Our time horizons are forever.” 57
Warren Buffett : Warren Buffett “If you are not willing to own a share for ten years, then don’t own it for ten minutes.” 58
Time horizon – Jason Zweig : Time horizon – Jason Zweig If, after checking the value of your stock portfolio at 1.24 p.m., you feel compelled to check it all over again at 1.37 p.m., ask yourself these questions: Did I call a real estate agent to check the market price of my house at 1.24 p.m.? Did I call back at 1.37 p.m.? If I had, would the price have changed? If it did, would I have rushed to sell my house? By not checking, or even knowing the market price of my house from minute to minute, do I prevent its value from rising over time? 59
Warren Buffett : Warren Buffett “The stock market is a mechanism by which, money is transferred from the impatient to the patient.” 60
Four equity investment strategies : Four equity investment strategies Invest in a well diversified portfolio of blue chip stocks Invest in well diversified equity mutual funds, index funds and ELSS funds Use systematic investment plans (SIPs) to invest in diversified equity funds, index funds and ELSS funds. Use systematic transfer plans (STPs) to transfer funds from safe debt funds to diversified equity and ELSS funds. 61
Reference papers: : Reference papers: 1. A Guide to Equity Investment 2. Good Investment Options in the Indian Debt and Equity Markets 62
Systematic investment is good for you : Systematic investment is good for you 63
Anthony M Gallea, Senior portfolio manager, Smith Barney : Anthony M Gallea, Senior portfolio manager, Smith Barney Investing is a strange business. It’s the only one we know of, where the more expensive the products get, the more customers want to buy them. 64
Systematic Investment : Systematic Investment Systematic investment automatically enables right pricing. Systematic investment makes investment a habit. “If you work on an investment, It will work for you.” 65
Systematic Investment : Systematic Investment 66
Systematic Investment : Systematic Investment The ultimate objective of good investing, is to obtain above average returns at below average risk. 67
Systematic Investment : Systematic Investment “A winner is not one who never fails, but one who never quits.” 68
You can control Risk : You can control Risk 69
Warren Buffett : Warren Buffett Risk comes from not knowing what you are doing. 70
The “Zero Risk” Systematic Transfer Plan : The “Zero Risk” Systematic Transfer Plan Invest Rs 1 lakh in a liquid, short-term floating rate or short-term mutual fund. From here, transfer Rs 1,000/- per month to a diversified equity fund or an index fund tracking the NSE-50 index. There will be no risk to capital at any point of time, regardless of stock market conditions. The STP can be doubled/quadrupled when the market falls by more than 25% / 50% from its previous peak. You can expect excellent returns in a period of five to ten years. 71
Warren Edward Buffett : Warren Edward Buffett “The first rule of investment is, do not lose. And the second rule is, do not forget the first rule. And that’s all the rules there are.” 72
Lump sum investments in equity & equity mutual funds must preferably be made with a margin of safety : Lump sum investments in equity & equity mutual funds must preferably be made with a margin of safety 73
‘Timing the Market!’ : ‘Timing the Market!’ 74
Sir John Templeton (1912 -2008) : Sir John Templeton (1912 -2008) “The time to invest in stocks, is when you have the money. History shows that time, and not timing, is the key to investment success.” 75
Return ranges for rolling periods on any day from 3rd April 1979 to 28th February 2007 (Sensex) : Return ranges for rolling periods on any day from 3 rd April 1979 to 28 th February 2007 (Sensex) Period Min. Return Max. Return 1 year - 54% + 268% 2 years - 26% + 143% 7 years - 08% + 43% 12 years + 02% + 34% 15 years + 11% + 28% 20 years + 13% + 21% 25 years + 15% + 18% 76
Benjamin Graham’s “The Margin of Safety” Approach : Benjamin Graham’s “The Margin of Safety” Approach 77
Benjamin Graham & David Dodd, Security Analysis, 1934 : Benjamin Graham & David Dodd, Security Analysis , 1934 Margin of safety is the difference between the intrinsic value of a stock and its market price. Accurate calculation of intrinsic value and margin of safety can be quite laborious. The end results may not be accurate, and such undertakings may be well beyond the capability of the common investor. 78
Benjamin Graham & David Dodd, Security Analysis, 1934 : Benjamin Graham & David Dodd, Security Analysis , 1934 A simple interpretation of Benjamin Graham’s margin of safety would be: Ensure that you do not pay too high a price for stocks. How can you do this? 79
Margin of Safety - Step 1 : Margin of Safety - Step 1 Be aware of the PE ratio ranges of the market. Historically, the PE Ratios of the popular indices like the BSE Sensex and the NSE-50 (Nifty) have ranged between 10 on the lower side and 30 on the higher side. 80
Margin of Safety - Step 2 : Margin of Safety - Step 2 Be aware of the market highs and lows, and percentages of high to low falls. 81
BSE Sensex worst falls – Aftermath of the Harshad Mehta Scam of April 1992 : BSE Sensex worst falls – Aftermath of the Harshad Mehta Scam of April 1992 22 April 1992 : 4,467 26 April 1993 : 2,037 Change : - 54.40% 82
BSE Sensex worst falls –aftermath of the Tech Bubble (February 2000), the Ketan Parekh Scam (March 2001) and the 9/11 Terrorist Attacks (September 2001) : BSE Sensex worst falls –aftermath of the Tech Bubble (February 2000), the Ketan Parekh Scam (March 2001) and the 9/11 Terrorist Attacks (September 2001) 11 February 2000 : 5,934 21 Sept. 2001 : 2,600 Change : - 56.18% 83
BSE Sensex worst falls – aftermath of The Global Financial Crisis, 2008….. : BSE Sensex worst falls – aftermath of The Global Financial Crisis, 2008….. 08 January 2008 : 20,873 09 March 2009 : 8,160 Change : - 60.91% 84
What modern stock market history teaches us : What modern stock market history teaches us Historically, falls in the market have not exceeded the 50% mark by much, except during the Great Depression, 1929-32. 85
Worst fall of the DJIA – aftermath of The Great Depression 1929-1932 : Worst fall of the DJIA – aftermath of The Great Depression 1929-1932 03 Sep 1929 : 381 08 July 1932 : 41 Change : - 89% 86
Step 3 – Thumb rule for determining the Margin of Safety : Step 3 – Thumb rule for determining the Margin of Safety PE ratios of the popular indices must be 20 or less; and The popular indices must be at least 25% below their last peak. 87
Step 4 – Applying the Margin of Safety on 24 January 2012 : Step 4 – Applying the Margin of Safety on 24 January 2012 PE ratio of the Sensex: 17.56 PE ratio of the Nifty: 18.28 Present Sensex versus last peak in percentage: ( 21,005-16,996): - 19.09% Present Nifty versus last peak in percentage: (6,312 – 5,127): - 18.77% 88
Applying the margin of safety : Applying the margin of safety If a margin of safety exists, lump sum investments into index or well diversified funds or a mix of these, should be fine. If not, go for five-year STPs or ten-year STPs. If a margin of safety does not exist, lump sum investments can also be considered in good asset allocation plans such as the FT India Dynamic PE Ratio FoF. 89
An important exception to the margin of safety : An important exception to the margin of safety Any investor who has a long-term systematic investment plan in equity or an equity mutual fund, need not follow the margin of safety, provided the investment is continued uninterrupted for at least 5 years . 90
A Strategy for All Seasons – Another exception to the Margin of Safety : A Strategy for All Seasons – Another exception to the Margin of Safety Whether a margin of safety exists or not, the “Zero Risk Systematic Transfer Plan” is a strategy that can be used by anyone at any time for fearless investing.
J P Morgan : J P Morgan “Bear markets are when stocks are restored to their rightful owners.” 92
7. Other Objectives : 7. Other Objectives 93
The setting up of a GENERAL INVESTMENT FUND : The setting up of a GENERAL INVESTMENT FUND What is a General Investment Fund? It is a fund to take care of all non-normal non-emergency, and non-retirement expenses. 94
Examples of non-normal, nonemergency and non-retirement expenses : Examples of non-normal, nonemergency and non-retirement expenses Children’s education Buying a vehicle Down payment on a house Renovation of a house Children’s marriage Other family functions Family vacations Charity Selective financial intervention & support 95
Other Objectives : Other Objectives A general investment account takes care of these non-normal, non-emergency and non-retirement financial needs. Constitution of a general investment account – the right mix of debt, equity and perhaps, real estate. When in doubt, a debt : equity mix of 50:50 should be quite all right. Try to allow three to five years to pass between initial contributions to a GIF and first withdrawals from it. 96
Strategy for a General Investment Fund : Strategy for a General Investment Fund Asset allocation funds or a fund of funds that meets your asset allocation requirement can be used for a general investment fund. Examples: FT India Dynamic PE Ratio Fund of Funds, FT Life Stage Fund of Funds – The 30s Plan. Try to invest at least 15% of your monthly take-home income to build a general investment fund, if there are housing loan repayments. If there are no loan EMIs, contribution to a general investment fund can be higher.
Other Objectives : Other Objectives Estate and succession planning HUFs, Private Family Trusts Housekeeping 98
Other Objectives - Housekeeping : Other Objectives - Housekeeping Filing tax returns correctly and on time. Ensuring that all investments are in joint names or with nominations registered. Educating spouse and children about finance and investment. Reviewing investments regularly. Making minimal changes only if required. Difference between reviewing and churning. 99
Other Objectives - Housekeeping : Other Objectives - Housekeeping Ensure that every member of the family obtains (subject to age eligibility): a passport a driver’s licence an election identity card an income-tax PAN card 100
Other Objectives - Housekeeping : Other Objectives - Housekeeping Examine whether family members need to : Complete KYC formalities for mutual fund investment; Open a client account with a member of the BSE/NSE; and Open a demat account with a depository participant . 101
Conclusion : Conclusion 102
Jack Welch, former chairman, General Electric : Jack Welch, former chairman, General Electric Control your destiny, or someone else will. 103
How much wealth should you build? : How much wealth should you build? Unsatisfactory financial position at retirement : No debts A residential apartment / house Financial assets, income from which just takes care of normal living expenses. 104
PowerPoint Presentation : Carl Richards , www.behaviorgap.com
How much wealth should you build? : How much wealth should you build? Satisfactory financial position at retirement : Health insurance Emergency fund No debts A residential apartment / house Financial assets, income from which takes care of normal living expenses; and Additional equal amount of financial assets reserved for growth. 106
How much wealth should you build? : How much wealth should you build? Good financial position at retirement : Health insurance Emergency fund No debts A residential apartment / house Financial assets, income from which just takes care of normal living expenses; and Additional amount of financial assets reserved for growth equal to twice the amount of principal deployed for regular returns. 107
Financial Planning – A Plan of Action : Financial Planning – A Plan of Action 108
Financial Planning - Plan of Action : Financial Planning - Plan of Action 1. Take health insurance for the entire family. 109
Financial Planning - Plan of Action : Financial Planning - Plan of Action 2. Take life insurance if required, and to the extent required. 110
Financial Planning - Plan of Action : Financial Planning - Plan of Action 3. Take property insurance if required, and to the extent required. 111
Financial Planning - Plan of Action : Financial Planning - Plan of Action 4. Establish a family emergency fund equal to at least one year’s normal living expenses. 112
Financial Planning - Plan of Action : Financial Planning - Plan of Action 5. Plan for retirement, NOW . Max out on your EPF contributions , if you are employed and eligible for EPF. Open PPF accounts for all members of the family. Start ELSS investments via the systematic investment route, if this has not already been done. Sustained long-term investment into a mix of EPF/PPF and ELSS plans of mutual funds are the best options for retirement funding. 113
Financial Planning - Plan of Action : Financial Planning - Plan of Action 6. Acquire a house , especially if you have not done so already, and are not likely to inherit one. 114
Financial Planning - Plan of Action : Financial Planning - Plan of Action 7. Get rid of debt , especially unproductive and open-ended debt. 115
Financial Planning - Plan of Action : Financial Planning - Plan of Action 8. Build a general investment fund across different types of asset classes. Always diversify . 116
Financial Planning - Plan of Action : Financial Planning - Plan of Action 9. Have a good idea of your other financial objectives, and build a general investment account, to achieve them . 117
Financial Planning - Plan of Action : Financial Planning - Plan of Action 10. Learn to differentiate between short-term and long-term monetary needs and invest accordingly. 118
Financial Planning - Plan of Action : Financial Planning - Plan of Action 11. Guard against hype , excitement and costs in investment and insurance. 119
Financial Planning - Plan of Action : Financial Planning - Plan of Action 12. Keep your documents in order & review your finances and financial papers at least once a quarter . 120
Financial Planning - Plan of Action : Financial Planning - Plan of Ac tion 13. Don’t neglect estate and succession planning . Make a will. 121
Financial Planning - Plan of Action : Financial Planning - Plan of Action 14. Ensure that all investments are in joint names or with nominations registered. 122
Financial Planning - Plan of Action : Financial Planning - Plan of Action 15. Don’t neglect tax work. Be tax-efficient, wherever possible. 123
Financial Planning - Plan of Action : Financial Planning - Plan of Action 16. Ensure that every adult family member has a passport, an IT PAN card, an election identity card and a driving licence . 124
Financial Planning - Plan of Action : Financial Planning - Plan of Action 17. Examine whether family members need to : Complete KYC formalities for mutual fund investment; Open a client account with a member of the BSE/NSE; and Open a demat account with a depository participant. 125
Winning! : Winning! Winning doesn’t always mean being first. Winning means constantly doing better than you have done before. Financial Planning enables everyone who implements it, to emerge a winner. 126
PowerPoint Presentation : “Someone’s sitting in the shade today, because someone planted a tree many years ago.” - Warren Buffett 127
Financial Planning for Young People just starting work : Financial Planning for Young People just starting work 1. Take out health insurance even if your company provides you with a health cover. Choose a floater. 2. Take life and property insurance only if required. 3. Start an emergency fund equal to one year’s normal living expenses. 128
Financial Planning for Young People just starting work : Financial Planning for Young People just starting work 4. Open a PPF account and start a minimum contribution to it. 5. Start an SIP into an ELSS. 6. Plan for a house about five years after you start work. 7. Do not get into unnecessary and dangerous debt like credit card debt, personal loans and personal overdrafts. 129
Warren Buffett : Warren Buffett “It is not necessary to do extraordinary things, to get extraordinary results.” 130
training@simplus.co.in : training@simplus.co.in 131
Thank you! : Thank you! 132