When is a good time to invest?

When is a good time to invest?

When the markets are high, people are concerned. When the markets are low, people are concerned.

IS IT A GOOD TIME TO INVEST OR SHALL I WAIT

– Investors always ask this question.

As a young student of finance more than 15 years back, I always wanted to know an answer to this question.

How does share price emerge?

This is an underlying thought of whether this is a good time to invest or not.

In quest of answering this question, I started reading books on investing. Fortunately, came across a book “Intelligent Investor” by Benjamin Graham.

This line in the book answered my question and changed my perspective on the stock market:

“In the short run, a market is a voting machine but in the long run, it is a weighing machine.”

In the short-term, mood of the market defines where the prices would be going. However, in the long-term, company’s performance defines the performance of share price.

Can there be an analytical tool to assess the market mood?

Let us look at how you can assess the current mood of the market. This factor does not predict the future but focuses more on the present state i.e. whether the market is over or under-bought.

Earning yield + Dividend yield – 10 years government yield

A positive number indicates that market is undervalued; else, you are better off in bond investing. At any point in time, the portfolio may be maximum 75% in equity and minimum 25% in equity.

If you would have followed this strategy for the last 18 years, using purely 10-year government bond yield and Nifty 500 index, the return would have been 15% per annum. Except 2008, for all the rest of the past 18 years, the return was positive. This way you can plan your portfolio better and manage your investment psychology better.

The analysis indicates that current market is overvalued, finding investment opportunities may be a challenge and you are better off parking majority of your investments in bonds.

Here are the investment rules I follow in my firm:

1. Assess the market using the analysis provided above. I use NSE500 as a proxy for equity, dividend yield as 1.57% and current 10-year government bond yield.

2. When my model indicates +2% factor, perform fundamental analysis on selected companies that are deeply discounted. This touches upon the long-term view, “market as weighing machine” analogy.

Where do you find deeply discounted value? A company that is fundamentally strong but has a lot of negative news around it. 52 weeks low is more relevant than 52 weeks high 🙂

3. If the factor is less than 2%, a combination of ETFs, short-term debt funds and a mutual fund may be used. Finding deeply discounted equity is a challenge in this zone.

I like sitting on cash i.e. being invested in bonds if I do not see any opportunity in the equity market. I do not like chasing returns; I like managing my risk better.

Please stay away from people who tell you that they will chase a certain return for you.

No one in the world can predict where the equity markets will go. However, smart investors always know that they can always manage their risk better and returns are generated over a period of time.

The consistency of return while managing portfolio risk is more important than high returns during bull-run.

Interestingly, print and TV news focuses on figuring out the short-term view of the market. There are not many options to get information without opinions. You will be better if you do not read or watch at all than getting opinionated about the markets.

Just keep it simple and manage your portfolio peacefully so that you do not lose sleep!

Why are you saving money ?

Why are you saving money?

Everybody wants to be ‘rich’ but very few have actually sat and thought through how rich they really want to be and what they need to do, to achieve financial freedom.

Circumstances and needs are constantly changing. A sound financial situation today does not necessarily foretell an equally rosy future.

  • A loss of income, even temporary can deplete your savings or leave you in debt.
  • An uninsured loss can wipe out your accumulated wealth.
  • Insufficient savings can force you into a reduced lifestyle post retirement.
  • Frequent or unplanned borrowings can leave negative money i.e. debts for future.
  • Poor tax planning can result in higher taxes, payable separately.

All this, combined with changes in your life cycle, needs and/ or external economic changes can make you and your future generations financially vulnerable.

You need to plan and manage your current and future income to meet your current and future needs / wants. These are also known as your goals or dreams.

People who write their goals are much more likely to achieve them. Sit down by yourself or with loved ones and try to imagine your future. Consider what drives you in your life and how that has changed over the years.

While I can’t tell you what you should want in life, the list of questions below can provide you with a fair idea of how you should start thinking about the future.

  • What milestones do you foresee in the future? starting a family, sending kids to college, buying a new home etc.
  • When would you want to retire? And with how large a corpus?
  • What are some of the other things that you may want to do in life?

Once you have a timeline of your goals, you will need to estimate how much money will be needed to meet them.

A portion of your current savings will need to be invested appropriately so that it grows to meet your future goals’ cost.

Make a list of all key expenses you foresee in the future. This will give you an idea of how to invest your savings.

Investing in kids is not a good investment ?

Investing in kids is not a good investment

In India, often people place more importance on spending on kids than understanding their other needs. Its extremely important to acknowledge that if you do not save for your child’s higher education, he or she may be able to take a loan. But unfortunately, there is no loan available to fund your retirement.

This also helps in answering the most common question “How should I prioritize my investment objectives?”

 You should always prioritize your financial freedom over your child’s future planning.

Usually, both the goals can be funded provided you have a decent number of years to save and grow your money.

Here is an example

Age: 35 years; Retirement age: 60 years; Current monthly expense excluding EMIs: Rs 1 lakh p.m.

Retirement corpus required: Rs 14.5 crores

Let’s say you have two kids, one who is 2 years of age and elder one who is 5 years. Usually, school fee does not require major planning, parents are primarily concerned with higher education cost.  

The current cost of Indian college education: Rs 15 lakhs. Education inflation in India: 10% p.a. 

College fees will be Rs 69 lakhs and Rs 50 lakhs respectively for two kids. You would need to save Rs 14,000 for 13 years and Rs 9,000 for 16 years.  

Cost of Foreign under-grad education:Rs 1 crores. Education inflation: 5% p.a.

College fees will be Rs 1.9 crores and Rs 2.2 crores respectively for two kids. You would need to save Rs 50,000 for 13 years and Rs 27,000 for 16 years.

Often when kids are young, people don’t plan. When a child is 15 or 16 years of age, parents start saving but that is not sufficient time for them to have the required corpus. When the child is actually seeking admission, parents tend to dip into their retirement fund say PF / PPF / LIC etc. These investments on their own are not sufficient to fund your retirement but when you withdraw your funds, you force yourself to have a dependency on kids.

When you spend money on your child, you should treat that as an expense anyway. If your child, later on, supports you, that’s fine but while planning your retirement you cannot go with the assumption that your child will support. 

In fact, given the changing times and high discretionary expense, investment in the form of PF/PPF etc. may not be even sufficient to meet your financial freedom requirement. You need to take charge of your retirement because no one else will fund it. Plan for your child’s future but don’t give it priority over your own retirement. 

Disclaimer: The article is not meant to hurt or challenge anyone. We believe relationships are better managed if you are wealthy and self-dependent.