Friday, February 25, 2011

Do you want to make money or Create wealth!!!

Every fall in stock market gives an opportunity to introspect to find answer to the eternal question:- Why do I invest? Is it to make money or is it to create wealth???
But one may ask --isn't making money same as creating wealth?? No, there's a fine line separating the two.
Making money is just about bank balance while wealth creation is more about meeting goals of your life. Making money may not always lead to wealth creation, but the vice-versa always holds.
To know what kind of investment strategy do you adopt, analyze your strategy in context of the under noted broad points.
Do you take investment/divestment decisions based on market sentiments for the immediate/medium term outlook??
Stock prices are a function of company profitability which in turn depends on the economy in general. Businesses take fairly long time to become profitable. Infosys and Marutis of the world were not made in a day. So you need conviction—and a lot of it—to invest in shares and reap rewards. At times it pays to ignore the noise emanating from the business channels and pink papers.
Do you have the urge to leverage??
A stock market investor is always tempted to make some quick money in F&O since he has always heard his broker talk about big money waiting to be taken home by trading in the F&O. F&O trades may also result in a big loss is apparent only in hind sight. It has the potential of being one of the biggest wealth destroyer.
Does the index level guide your investment/divestment decision?
During the course of our dealings with our investors, we are usually asked whether this is the right time to buy or sell? Honestly speaking, we do not have and never have had an answer to such question! Imagine an investor who had sold off his holdings in Reliance diversified power sector fund at the NAV of Rs.9/- reached within a year of the scheme opening for ongoing subscription, since the outlook to the fund and/or sector was not very encouraging. The fund thereafter has grown investors wealth eight fold over last 6 years.
Do your emotions play any role in devising buy/sell decisions?
Do you feel sad having to see the market gallop away without your participating in it? Do you feel that the whole world except yourself has become rich? Do you thereafter enter the market guided by your feeling left out and trying to make up with the lost time(and profit).
We seldom realize that it is not our thinking that makes big money, but it is sitting. Even the legendary Warren Buffet has said that he would not be worried if the stock market were to open a decade after he bought shares. Facts like these tell us that trading will not help us create wealth.
Do you believe that trading in stocks will help you in building your portfolio?
Investors usually believe or better still they have been conditioned to believe that by regularly buying and selling shares/MFs, you can make money! The moot question is for whom? If you can make money by trading in shares/MFs, than there are equal chances that you may lose some or all also. Can you afford to lose sight of your goals or face the prospect of not being able to meet one or more of them?
If the answer to your analysis as above is positive, then it is time to change your investment strategy.
Wealth creation is akin to hand holding. We invest in companies or Mutual Fund schemes with a clear focus on our goals and our resolve to meet them. Equity as an asset class will deliver inflation adjusted returns but over long term. This “long term” has to be calibrated to your goals. According to an interesting study done by Fidelity, it was shown that over the last 16 odd years, there have been almost equal number of good bad quarters as far as equity returns are concerned. So theoretically, market (sensex)should be still trading close to 3000 levels. But it is trading at 18000 levels.

Friday, February 4, 2011

Why investors must look beyond returns

Investments today come with a shelf life. Rarely do we come across an investor who has held onto his/her investors over very long time. 
Investors tend to forget or overlook the fact that investment is not an end in itself but rather a process to meet your goals. Till a few months before, investors were willing to invest in the equity market since it was moving up. The flow of money turned off or even worse it reversed-- when the market took a beating. In other words investors bought high and sold low--doing exactly the opposite.

Returns or better still maximum returns is the mantra of the day. Any investment yielding less then acceptable return is jettisoned and fresh investment is made in share or mutual fund showing highest return. The fact that it is historical returns that is being displayed rarely comes to the investors mind. We at AIMS always advise our investors to look beyond returns and daily/monthly market movements--rather look at goals for the fulfillment of which the said investment was made in  the first place We re-produce an article "why investors must look beyond returns" here below:-

"Ask an investor, which investment avenue he wants to invest in and there’s more than a fair chance that he will say – the best performing one i.e. one that can deliver the highest returns. Sounds reasonable, doesn’t it? Why would an investor like to settle for anything less than the best, right? The trouble with such an approach is that it oversimplifies the investment process. As a result, emphasis is laid only on the returns aspect; vital factors like risk and suitability are ignored.
Far too often, investors and advisors alike are guilty of falling prey to the allure of high returns. The rationale being, investing is all about clocking the highest return, hence any avenue that can deliver on this front gets the thumbs up. Don’t get us wrong. We are not suggesting that returns aren’t important or that there is necessarily something wrong with an avenue simply because it can deliver a better showing on the returns front vis-à-vis other avenues. However, selecting an investment avenue based solely on its performance is certainly a flawed approach.
In the first place, such an approach erroneously assumes that the investment avenue (say a mutual fund for instance) is an end, rather than a means to achieve an end. While investing, the end should be a tangible goal like providing for one’s retirement, buying a car or simply wealth accumulation, expressed in monetary terms. And once the target sum has been established, appropriate avenues to achieve that end should be chosen. Conversely, if the investment process begins with the selection of the investment avenue, the investor ends up investing in an aimless manner and may never achieve his goals.
Second, by investing in an avenue based solely on returns, the investor runs the risk of getting invested in an avenue that might be unsuitable for him in terms of the risk involved. For instance in the equity funds segment, by and large one would expect a diversified equity fund (which invests its entire corpus in equities) to outperform a balanced fund (which invests around 65%-75% of its corpus in equities and the balance in debt instruments) in times when equity markets are rising. But from an investor’s perspective, the key lies in determining what’s right for him.
For example, assume that a balanced fund can deliver a 12% CAGR over a 5-Yr period; conversely, a diversified equity fund is equipped to deliver a 15% CAGR over the same time

frame. Say an investor wishes to accumulate Rs 500,000 for a holiday 5 years down the line. Now the investor has to choose between investing in a balanced fund or in a diversified equity fund. Should the investor decide to build a corpus using a balanced fund, he will have to invest around Rs 6,223 per month or Rs 78,705 pa. Conversely, opting for an equity fund will necessitate a lower investment i.e. Rs 5,792 per month or Rs 74,158 pa.
Most investors might instinctively opt for the equity fund option on account of the higher return (i.e. a lower investment amount). However, while making the choice, the risk factor has been ignored. On account of the debt holdings in the portfolio, the balanced fund is invested across asset classes i.e. equity and debt. Over the 5-Yr investment horizon, should equity markets witness a rough patch, the balanced fund will be better equipped to protect the investor’s corpus. In effect, the trade-off for the higher investment amount is the proposition of delivering during a downturn in markets. Before making a choice, the investor should first evaluate his risk appetite and then choose between the balanced fund and the equity fund.
Another reason investors opt for the best performing avenues is excitement. Yes, you read that right. There is a section of investors, which believes that the investment activity should be exciting; hence selecting investment avenues offering the highest returns is justified. For the record, investing has nothing to do with excitement; on the contrary, investing is serious business and is all about achieving one’s predetermined financial goals. Seeking excitement from the investment activity amounts to trivializing it.
In conclusion, investors would do well to look beyond just returns while making an investment decision. Sure, returns are important, but certainly not a parameter to be considered in isolation. The key lies in looking at the investment activity in totality and then making a decision. If not, investors run the risk of missing the wood for the trees.