Hold on to a Lazy portfolio

Have a mix of index funds, diversified equity schemes and fixed deposits. Nobel Prize winning economist Paul Samuels on had famously said: “Investing should be m ore like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.”

With stock markets going nowhere and fixed income instruments offering high returns, a typically active retail investor would like to juggle around his portfolio to earn the best return on investments.

But what happens, when the markets turn around in say, six months or one year?

Over dependence on debt would mean that to participate in the ‘equity rush’ one has to break fixed deposits (FDs) and move into stocks or equity funds.

The confusion can be worse because taking out money mid-way and moving into equities would mean loss of interest income and, perhaps, even a penalty. With market and interest cycles turning every three to four years sometimes even sooner, retail investors cannot always keep churning portfolio.

To ride a wave of uncertainty and continue to earn returns, albeit lower in bad times, one needs to stay invested. And importantly, be lazy. Do not get fidgety or nervous with the yo-yoing markets or the rising interest.

Being lazy does not mean you don't track investments? It means not wanting to take advantage of every situation.

Constructing a lazy portfolio is quite simple. For equity investments, find the best performing equity diversified funds and invest, either through systematic investment plans or a lump sum.

If you are not confident of picking the right fund or the statutory warning 'past performance is not a guarantee of future performance' scares you, certified financial planner, Gaurav Mashruwala’s solution is index funds.

“These funds replicate the market. Keep tracking your portfolio on a quarterly bas is. But do not churn regularly. Stay invested for as long a time horizon as you can. And never try to time the market,” said Mashruwala. For the fixed part of portfolio, invest in FDs for over five years to take advantage of 80C benefits.

There are three main reasons why lazy portfolios can be winners. For one, they’re simpler. You will never need more than a few mutual fund schemes. So forget the hundreds of schemes out there.

Two, you save on commissions and transaction costs that you would have to incur if you are a hyperactive investor.

Three, you save enormous amount of time and effort that an active investor would spend worrying about investments.

Forget about the frequent rebalancing, market timing and active trading. Just create a well-diversified portfolio and s top tinkering.

Say you have decided on an 80:20 portfolio, the equity investments should be in few well diversified funds.

One could take five-year returns of 40-50 diversified equity mutual funds available in July 2006 and invest 20 per cent of the lump sum or through Sips.

If one were to take the lump sum route, a scheme like UTI dividend yield fund, would have returned 21.6 per cent annualized over five years (from 15 July, 2011), or in absolute term 166.2 per cent.

Similarly, locking into five-year fixed deposits would have returned 8.5 per cent annually. An 80:20 portfolio would have earned around 18.98 per cent annually. Even in high inflation times, these returns would comfortably beat it.

(Source: Business Standard 19/07/2011)

Property or Equity(funds)

Property investing seems to have grabbed the attention of every investor--big and small. As if your portfolio is incomplete without an investment in property. It seems to be infallible way to make money—never mind the long holding period. To add further halo to “property investments” there are innumerable media stories about property prices hitting the roof and how people made a killing by selling their investments at 10,20 or may be 30 times their cost. No matter of number crunching will help deter investors from investing their life’s savings in property rather than in financial markets. Invariably the most likely counter argument will be that his equity investment made in say 2007 is yet to yield profits. The 800 pound gorilla called real estate is pounding the financial portfolio of clients flat.

Interactions like these made us think as to what makes property markets tick? Why is it that it is looked upon as the best wealth creating opportunity? Why is it that a person—who has just started earning—first tries to buy a house rather than think about say his goals in life!

We recently read about a property deal worth about Rs.33 crores. The investor had bought the property way back in 1972 for only Rs. 25 lacs. Things couldn’t have been any better. Rs. 25 lacs growing to Rs. 33 crores. I decided to do some number crunching—to see if equity funds have indeed given such returns? My excel sheet showed me that the investor had earned an IRR of 13.70% only between 1972 & 2010. I would have told the gentleman that equity funds have beaten his 13.7% return comfortably in last 15 years of existence itself. Sample of returns generated by equity funds over last 15 years are as under:-

HDFC Equity Fund	:-	27.60% CAGR
HDFC Prudence Fund	:-	24.70% CAGR
DSP BR Equity Fund	:-	24.17% CAGR
Reliance Growth Fund	:-	27.53% CAGR
Franklin India Blue Chip Fund	:-	25.22% CAGR

This made us think as to why this disconnect with equities even when they have delivered better returns than property over similar time frames? The fact is that equity funds have delivered returns in the range of 20%+ CAGR over 15 years. The fact is that this is significantly higher that 13-14% CAGR generated by properties located in upscale locations. Why is there a perception—built into our DNA—that property is a better wealth creator?  The fact of the matter is that in case of real estate it is absolute numbers that is talked about—and never CAGR.

For example the price of a flat in Bhowanipore area of Kolkata (an upscale location) was roughly Rs. 1600/- per sq. feet in the year 1996 and is presently quoted at about Rs.9000/- per sq. feet. A flat that cost Rs.32 lacs in the year 1996 is worth Rs.1.80 crores today—a CAGR of 12.20%. However, rather than talk about CAGR it is only absolute figures of 32 lacs becoming 1.80 crore that we get to hear. To put things into perspective, if this person had instead invested in say Reliance Growth Fund that 32 lacs would have become Rs. 16 crores over 15 years! Suddenly, the appreciation made in property prices pales in comparison to the gains made by equity funds over the same period, both in absolute terms as well as in terms of CAGR!!

Virtues becomes spoil sport

Equity funds have many virtues which the property cannot ever match.

Liquidity: - It is always possible to liquidate your fund holdings whether the market is bullish or bearish. As for property—try selling one in times of economic slowdown and you’ll see the difference.

Transaction costs: - Add on cost in case of property can increase your final cost. Costs like stamp duty, registration charges, maintenance expenses can be prohibitively high.

Equity funds on the other hand with no entry load, beat property hands down.

Taxation: - NIL LTCG in case of equity funds as of now. Do you think a 20% indexable tax will be able to beat this?

Finally

There is no doubt that Indians’ love for property is very strong. There is also no doubt about the long term wealth creation potential of property investments. I also humbly state that equities are equally good if not better wealth creators over similar long period of time. Not to talk of the freebies that come with equities like tax breaks, low transaction costs, liquidity, transparency etc.

Maano ya na maano….

Equity or Mutual Fund

It is an accepted fact that equity (stocks and MFs) have the power to deliver handsome returns over long time frame. However, many direct equity investors lack the ability to deal with the complexities that is required in dealing in stocks.

No expert is able to predict the right time to enter/exit a particular stock. There are innumerable stories of success and despair relating to stock market. The biggest hurdle for the direct equity investor is the buy list. It is the easiest thing to do. The key to making profits is “it is when you sell that counts.”

Indian equity markets are aligning to global markets and with increasing number of Indian corporates raising money from abroad, the factors affecting a particular company have become more complex, more varied and all the more difficult for an equity investor to comprehend. Media is agog with buy list daily. However, this freebie is fraught with too many risks. One of the biggest risks being biased advised being doled out. This is more applicable to investors who take buy decision based on “tips” given by brokers and experts. This noise creates a halo around a stock and more often than not an investor falls prey to such noise. The resistance to buy decreases as the price increases. Past (price) performance however compelling cannot be the guiding factor to buying a stock or a Mutual Fund.

One more reason why direct equity investors buy is that every body is buying. This is commonly referred to as herd buying. The basic assumption being that so many people cannot be wrong. The other reason being momentum buying. The information about most traded stock, stocks with high delivery volume and the stock which has risen most are daily published by business papers. This supports momentum buying. However, the fact that this momentum can wane as quick as it had rose is seldom factored in by buyers. Buying suddenly vanishes and investors are left with stocks quoting at a fraction of the price they were bought. It may go down to zero as well.

It is rather more easy and simple to choose a fund. The fund manager is more suited to build and manage a portfolio of stocks as he has far more resources --in terms of money, information and expertise—at his command.

Rather than compare performance of individual stocks against the fund, investors should pit their entire stock portfolio against the fund and see if their stock portfolio has been able to beat the best of the minds in fund management.  A 2.50% Fund management charge and your advisors fees is a small price for a far simple way to create long term wealth. 

What to do in Today's Market

Only bad news seems to be coming out from the markets. Greece default, high inflation, high interest rates hurting economic growth and corporate profits, Scams taking toll on governance, no big or small economic reforms by a government headed by the father of economic liberalization et all.

Pessimistic mood seems to be the order of the day. Investors are happier to put away their long term money in debt rather than equity. It’s just that equity investing for long term seems to be losing relevance. The feeling that you can invest tomorrow at lower price seems to be gaining momentum with every passing day.

What does all this mean for a person who is investing for long term? Dangerous frame of mind if such a person starts to develop such state of mind. It is during times like these in which the seeds of forthcoming rally are laid. You would have built up a sizeable chunk of equity holdings at low cost over a year or two of monthly SIP during such uninspiring markets.

For a serious investor who is investing with specific goals in mind 5-10 years away, such gloomy days can prove to be promising. You’ve just come across a period of time when you can quietly form a base of future fortune. In fact it is persistent equity investments during such period that you can look forward to getting a second earning member for your family.

We would like to re-iterate what we had pointed our in the 1^st. part of the article:-

Don’t let market condition determine your asset allocation

It would be very tempting to divert your equity funds to high coupon fixed interest securities. We had said, “But abandoning equities now and moving to debt and cash would be a mistake.” In times like this it pays to keep the focus—on equities.

You will be rewarded for staying cool

It's not easy to step back for perspective when you are gasping for air as your portfolio value plummets. But any sensible long-term investor will tell you that bear markets are setting up the next bull market. They are also keenly aware that bull markets don't run forever. So it is only natural that in a volatile market investors should expect some short-term losses in their portfolios. Even a great company's stock can get banged around in a tough market. But that does not make you a loser (though you may look like one). While the old "buy and hold" mantra may seem like cold comfort at times like this, rest assured that it has a better long-term record than market-timing.

This too shall pass 

However bleak the scene appears, it is not here to stay forever. Bargain valuations are available only in such times. But the key is to understand whether

such times are temporary or long lasting.

Till then “lagey raho”.